Surviving But Not Thriving : Commercial Real Estate Is Showing Signs of Life
Southern California’s recession-weary commercial real estate market is slowly mending, analysts say, with vacancy rates inching downward and rents beginning to stabilize after a long plunge.
Sales of office buildings are also picking up as lenders slash prices to unload foreclosed properties and out-of-state investors look west for returns that are sometimes twice the national average.
About 28 large office projects worth a total of $450 million were sold in Los Angeles County in 1993, according to commercial broker Cushman & Wakefield, and half a dozen more deals worth nearly $100 million are in escrow. Only 23 buildings, worth $292 million, were sold in all of 1992.
Even the WCT Building--the triangular blue glass tower that has sat vacant and alone on the west side of the Harbor Freeway in downtown Los Angeles for nearly a decade--was recently purchased by a group of optimistic investors.
But the market is still paying a steep price for the excesses of the 1980s, when low vacancy rates and easy financing triggered an unprecedented construction boom and fast-rising prices attracted investors from around the globe.
“You can’t really call our commercial market healthy,” but it is getting better,” said Richard Plummer, an investment broker in Cushman & Wakefield’s downtown Los Angeles office.
Plummer said the Southern California market, like a hospital patient near death a year ago, “has been upgraded from ‘flatline’ to ‘critical but improving.’ ”
Even a modest rebound could have beneficial ripples, particularly in Los Angeles County, the state’s most depressed area. New office tenants need furniture and equipment, places to eat and parking attendants.
*
As the rental market gets tighter, major new office projects are likely to appear--a sight not seen in Los Angeles or Orange counties in more than three years.
Combined, the two counties account for about two-thirds of Southern California’s office space, and both are showing signs of improvement.
Orange County’s office vacancy rate fell to about 18% in 1993 from 19.3% in 1992, about in line with the national average, according to Grubb & Ellis Commercial Real Estate Services.
Vacancies are expected to drop another 1% in 1994 thanks to a modest pickup in demand and a dearth of major new construction projects, said Bob Bach, Grubb & Ellis’ research director.
Los Angeles County’s vacancy rate stands at 19%--down from 20% a year ago--and is expected to drop to 18.5% in 1994.
But clearly, some parts of the basin’s far-flung office market are faring better than others.
Building sales and rental rates are strongest in the Burbank area, where Disney Studios and other entertainment companies have been rapidly expanding for years.
Vacancy rates are dropping and rents are stabilizing in the huge downtown Los Angeles market, where landlords are offering space in newer buildings for about the same rent that tenants have been paying at older projects in other parts of town.
But many of downtown’s newest business residents have come from the Mid-Wilshire area, a district still suffering from the 1992 riots that devastated nearby Koreatown.
Vacancies also continue to climb in the South Bay, home to much of Los Angeles County’s once-thriving aerospace business.
While the pickup in activity in downtown Los Angeles and Burbank is helping building owners in those areas, Bach said problems in Mid-Wilshire and the South Bay will hinder the entire region’s recovery.
“The strong parts of the county just can’t take off when there’s so much space available in the weaker markets,” he said.
*
Although vacancy rates are still high enough to prevent most commercial landlords from raising rents, a handful of building owners are starting to cut back on the concessions they’re willing to give new tenants.
Overbuilding and high vacancies have pushed rents down more than 25% in most parts of Southern California over the past four years. To lure new tenants, landlords were forced to offer a variety of incentives--from huge remodeling allowances to “signing bonuses” that put cash in the renters’ pockets when a lease was signed.
But some of those concessions are beginning to disappear as the market slowly tightens.
One year ago, insurance broker Willis Corroon signed a 10-year lease at a Glendale high-rise that locked in a $25-a-month parking fee for employees.
But only a month ago, brokers say, Home Insurance Co. agreed to pay $45 a month for parking spaces in the same building, and the owner can raise the fee every year.
“Landlords in the stronger areas are beginning to make up some of the ground they have lost over the past few years,” said Bill Boyd, a broker in the Glendale office of CB Commercial Group. “We should see rental rates start rising again by next fall.”
Analysts attribute the big increase in building sales last year primarily to the growing number of lenders who are cutting prices to unload their foreclosures.
Those fire-sale prices have attracted investors from other parts of the United States, many of whom are betting on a California comeback to provide investment returns that far outpace those available in healthier markets.
The prolonged drop in commercial real estate values--combined with a healthy dose of optimism about the market’s future--was the catalyst behind Taiwan-based Format Corp.’s recent purchase of the WCT Building at 1100 Wilshire Blvd.
The high-rise, which has been virtually vacant since it opened in 1985, sits alone on the western edge of the Harbor Freeway and is a familiar sight to motorists as they cruise through downtown Los Angeles.
Privately held Format paid about $18.5 million for the complex, which cost about $75 million to build a decade ago.
“This was just too good of a deal for us to pass up,” said Bob Caudill, the broker who represented Format and now has the task of trying to fill the 37-story, 330,000-square-foot building.
Caudill said he plans on marketing the complex under a new name, 1100 Wilshire, because “the WCT name conjures up too many negative images.”
Slowly Healing
Vacancy rates for office space in all Southern California markets are dropping after years of mostly steady increases. The decline is expected to continue in 1994, thanks to a gradual economic recovery and a dearth of new construction.
* Orange County
1988: 23.2%
1994 (projected): 17.3%
* Ventura County
1988: 15.7%
1994 (projected): 21.0%
* Los Angeles County
1988: 14.7%
1994 (projected): 18.5%
* Inland Empire
1988: 21.6%
1994 (projected): 19.8%
* San Diego County
1988: 20.2%
1994 (projected): 22.0%
