LAX Area’s High Vacancy Stuck in Holding Pattern
The recession ended nearly five years ago, but the news doesn’t seem to have reached the office market near Los Angeles International Airport, where a third of the buildings are vacant--a figure that has changed little in the last several years. Tenants have proved so hard to find that one landlord may soon convert his office building into a parking garage.
Other landlords and property managers who still believe the market can be saved back a plan for landscape improvements along Century Boulevard. They hope to spark a revival of interest in what has long been the region’s most lackluster office corridor. For the time being, however, large blocks of space go begging for tenants, even as neighboring office markets in El Segundo and Marina del Rey thrive.
The high vacancy rate at LAX is an aberration in the Los Angeles area, where nearly all other office markets have shown improvement. Even markets that were 20% vacant or worse two years ago--such as downtown Los Angeles, Long Beach and Torrance--have all shed much of their vacant space.
What’s wrong with LAX? The area’s reputation as a weak market continues to hinder leasing, according to Steve Solomon, an office broker with Seeley Co. “The biggest problem is there has been a historical vacancy rate of 30% to 40% for the last 12 years,” he said.
Yet not every LAX landlord is taking a bath. Beverly Hills-based Arden Realty Group Inc. owns three buildings on Century Boulevard. Two of them are about 90% occupied, while the third, at 5200 Century, recently underwent an interior renovation and saw its occupancy rise in the last year from 20% to 80%, said Senior Vice President Rob Peddicord.
The LAX office market, made up of about a dozen buildings on Century and Sepulveda boulevards, was built in the late 1970s and early 1980s to serve the then-burgeoning aerospace industry. So great was the demand from major aerospace companies that at least one high-rise on Century started construction with no more than a verbal promise of occupancy from a major tenant--which ultimately decided against leasing space.
The end of the Cold War and resulting contraction of the defense sector sapped much of the life from the LAX office cluster. A lack of restaurants and street life on Century Boulevard also hobbles the market, according to James Nagle, president of Coastal Commercial Real Estate Services.
“The biggest negative is the lack of amenities and the lack of a quality environment,” Nagle said. A prominent billboard near the airport advertising adult entertainment may not be attractive to renters, either.
As a result, tenants who want space in the airport area often opt for El Segundo, even though the lease rates are higher. Buildings near LAX lease for as much as $1.40 per square foot monthly, while office space in El Segundo goes for as much as $2.25.
Among LAX-area tenants are travel companies, clerical operations for air carriers, freight-related companies and the government. A 50,000-square-foot lease was recently signed at 5200 Century Blvd. by Greater Avenues for Independence, a Los Angeles County job-training program.
Despite the LAX market’s acknowledged shortcomings, Solomon said he cannot fully understand why LAX continues to have problems. The market, he pointed out, is half a mile away from the San Diego Freeway and just a few miles from the ocean. LAX also has the benefit of being close to popular office markets, including the Rosecrans Boulevard corridor, Marina del Rey, El Segundo and Playa Vista, and residential neighborhoods, including Westchester. “You just wonder why [the LAX office market] hasn’t turned around,” Solomon said.
The area’s high vacancy rate may be misleading, according to Arden’s Peddicord. Like downtown Los Angeles, LAX is a multitiered market that includes both Class A buildings that are up-to-date and nearly full and Class B and C buildings that are obsolete and half-empty.
Landlords who wish to earn more income from obsolete office buildings sometimes find new uses for them. An eight-story office built in 1981 at 5757 Century Blvd. may be converted to a “park-and-fly” facility. If owner GE Credit Equities goes forward with its plan, the office building’s spacious atrium would be replaced with a parking ramp, and office space would be filled with parking stalls for visitors who would park their cars and ride shuttles to the airport.
To address the problem of visual blight on Century Boulevard, 53 local property owners formed a business improvement district called Gateway to L.A. a year ago to improve the image and business vitality of Century Boulevard. “The idea is to invigorate the boulevard and to increase the occupancy rates in both office buildings and hotels,” Executive Director Merry Norris said.
The larger ambition of the group is “to create a real gateway for Los Angeles,” she added, pointing out that Century and Sepulveda boulevards are usually the first streets travelers see after leaving the airport.
The group meets with representatives of the Los Angeles Board of Airport Commissioners. In its own efforts to renovate and beautify the existing LAX facilities, the airport board hired a team of designers headed by Los Angeles architect Ted Tanaka to propose a series of “beautification enhancements” to LAX. Suggestions include new landscaping, improved signs and possibly a monumental gateway on Century Boulevard. (The proposed enhancements involve existing buildings only and are separate from the proposed LAX expansion.)
On its own, the Century Boulevard group has hired Los Angeles architect William Fain of Johnson Fain Partners to propose ways to beautify Century Boulevard between the airport and the San Diego Freeway.
Among the ideas being studied by the business group are new design standards for new construction on Century Boulevard, planted medians and new trees along the boulevard, setbacks for cargo-related buildings and the creation of a jogging path to the beach.
For landlords, meanwhile, the goal is to bring vacancy rates down to a manageable 10%, according to Seeley’s Solomon. At that point, he said, landlords could finally fulfill a long-held wish and raise the rents on Century Boulevard.
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Real Estate Trends
Los Angeles Airport Area Office Net Absorption
(in millions of square feet)
Eight-quarter average: -0.05 million square feet
Los Angeles Airport Area Office Vacancy Rates
4th quarter, 1998, with sublet: 32.6%
Without sublet: 31/2%
*
Note: Net absorption reflects the gain in rented space. Vacancy rate is the total vacant square footage-divided by total rentable square footage in all existing buildings. Sublet space is space rented by primary tenants that is vacant and available for sublease.
