Demand for Westside Office Space Slips With ‘Dot-Coms’
Troubles in the “dot-com” world and a general cooling of the economy have triggered the first slowing in years in Los Angeles’ most popular office market.
The vacancy rate in the extremely tight Westside has climbed at least four percentage points since it hit its low of 3.4% early this year, according to commercial real estate firm Julien J. Studley Inc.
Slower leasing by no means represents a dramatic downturn, experts say, but even a cooling trend is noticeable in an office market that has been one of the hottest in the country in recent years.
“I don’t mean to say that we are in a recession or that the market’s falling,” Studley Vice Chairman Howard Sadowsky said, “but this is definitely a market that has flattened out.”
Internet and electronic-commerce firms created much of the demand for Westside office space during what Sadowsky called “the height of the frenzy” this year. Dot-coms remain an important force in the market, but demand for additional space from dot-coms and traditional tenants has dipped.
“For the last three or four years, this sort of thing [a slowdown] was unheard of on the Westside,” Sadowsky said.
Although the general slowing of the economy may reduce activity in office markets throughout Los Angeles County if it continues, Sadowsky said, the impact of the dot-com slowdown is by far the greatest on the Westside.
Internet-related firms in the last three months have either vacated or offered for sublease more than 560,000 square feet of Westside office space, according to a Studley survey. The dot-com tenants have gone out of business, realized they rented too much space, or merged with other companies and need less space, said Bruce Schuman, a senior vice president at Studley.
During the height of the boom, Sadowsky said, the dot-com companies were determined to find space on the Westside at almost any cost. Some took more space than they needed, expecting to grow, he said.
Prospects still remain bright for owners of office space, said Tom Herta, vice president for Menlo Park-based Spieker Properties, a real estate investment trust. He said the vacancy rate in Santa Monica is close to 2%, compared with the overall 7.5% rate of the Westside market.
“We’re not seeing the start-up dot-coms that we saw six months ago,” Herta said. “We have not been seeing as many prospects come around, but the quality of the prospects is better.”
Disenchantment with dot-coms has many landlords eager to do business with the kinds of traditional businesses that commanded top attention during the last real estate boom in the 1980s, such as law and accounting firms.
“Some of the most beautiful tenants in the pageant right now are good, old-fashioned insurance companies,” said broker Robert Chavez of Staubach Co.
Chavez represented one of the Westside’s biggest dot-com tenants, IXL, this year when it signed a 10-year, $40-million lease at Howard Hughes Center in Westchester. IXL is closing that office as part of a corporate restructuring, the company said last week, and Chavez is marketing its 100,000 square feet as sublease space. At the same time, he said, IXL is negotiating with landlord Arden Realty in hopes of terminating the lease.
Although Chavez agrees the activity is leveling off on the Westside, he said demand for office space is still strong enough that Arden might be able to lease the IXL space to new tenants at higher rates if Arden agrees to terminate the lease.
The leveling off is so new, having begun just in the last six or eight weeks that many people are unaware of it, Schuman said. Rental rates have not declined, which typically occurs when vacancy rates increase, although some landlords are beginning to offer other concessions, such as move-in allowances or more money for customizing space to a tenant’s requirements.
“For most of this year, we were on the chasing side of deals. Now we’re getting phone calls from landlords,” Schuman said. “They’re telling us they’re more flexible than they were three months ago.”
Other businesses are already benefiting from some of the space vacated by dot-coms, Schuman pointed out. For example, DotTV, the official worldwide registry for Internet domain names ending in .tv, moved into approximately 30,000 square feet of space at 1100 Glendon Ave. in Westwood within weeks after the space was vacated by Thirsty.com.
“It was a good opportunity for us,” said Craig Frances, president and chief operating officer of DotTV, which moved into the Westwood space from its quarters in Pasadena.
The former Thirsty.com space was ideal for DotTV because the offices were already wired for high-speed Internet access and the lease included furniture, Frances said.
Some landlords may also benefit when dot-coms vacate space because “they did the deals two years ago, at lower rates than they’re getting today, so they might be able to get higher rates with a new tenant,” Schuman said.
On the other hand, Schuman added, the situation can work against landlords when tenants who have excess space offer to sublease it at lower-than-market rates, competing against full-priced space offered by landlords.
Even with a slight leveling off, the Westside markets are maintaining office vacancy rates lower than those in most other parts of Los Angeles County, where vacancy rates range from less than 10% to more than 20%.
And the Westside still needs more office space, noted Sadowsky, who said the relative lack of new construction and the difficulty of gaining approval for new projects means vacancies are likely to remain low as long as the economy remains stable.
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Westside Softens
After plunging for most of the year, vacancy rates in West Los Angeles and Santa Monica are easing up slightly, partly as a result of “dot-com” downsizing.
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Source: CoStar Inc
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Back on the Market
Troubled tech companies have put a significant amount of office space back in play.
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Initial Recently square subleased feet or now Company Location leased available Homepage.com Howard Hughes Ctr., Westchester 43,000 19,000 IXL Howard Hughes Ctr., Westchester 100,000 100,000 Sapient Water Garden phase II, Santa Monica 80,000 50,000 People Support 1100 Glendon Ave., Westwood 50,000 28,000 E-Toys.com Westwood Media Ctr., Westwood 150,000 38,000 DEN 2236 Barrington, Santa Monica 31,000 31,000 MValue.com 3654 Lenawee Ave., Culver City 35,000 35,000 Internet Connect 20770 Madrona Ave., Torrance 200,000 91,000 Thirsty.com 1100 Glendon Ave., Westwood 19,000 19,000 Stamps.com 3420 Ocean Park, Santa Monica 70,000 40,000 Career Path 10880 Wilshire Blvd., Westwood 30,000 24,000 Creative Planet 5700 Wilshire Blvd., Miracle Mile 80,000 40,000 Dunknet 2644 30th St., Santa Monica 30,000 30,000 TopTutor 7th and Wilshire, Santa Monica 11,000 11,000 Scour.com 345 Maple Drive, Beverly Hills 10,000 10,000
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All information furnished is from sources deemed reliable. No representation is made as to the accuracy thereof and it is submitted subject to errors or omissions.
Source: Julian J. Studley Inc.
