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Growth in Rentals Expected to Continue

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SPECIAL TO THE TIMES

Demand for office and industrial space will remain strong throughout Southern California in 2001 despite the prospect of a cooling national economy, but leasing should be a bit less frenzied in some of the most popular business neighborhoods such as L.A.’s Westside, where hungry tenants devoured nearly every inch of new office space in 2000.

That’s the gist of a forecast on commercial real estate in Los Angeles, Orange, Riverside and San Bernardino counties released Monday by Grubb & Ellis, an international real estate services firm.

The forecast projects continued growth in demand, rising rents and moderately paced new construction in commercial markets that have steadily gained steam since the region’s economic recovery began in the mid-1990s.

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However, the forecast comes with a caveat from Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. Continued good times in real estate depend on a healthy economy, and though Kyser’s outlook calls for “still solid growth” in 2001, he also concludes that risks are growing.

Tighter credit scrutiny by lenders, rising energy costs, a shortage of qualified workers in some industries and high housing costs combined with lagging residential construction are some of the factors that could retard the region’s economy next year.

On the other hand, Kyser points to strong economic drivers pushing the region forward. Among them are Disney’s “California Adventure” expansion that will boost tourism, continued work on the Alameda Corridor, business expansion and further growth in international trade, tourism and business and professional services.

Against this backdrop, Grubb & Ellis foresees improvements in office markets that have been soft and continued strength in the tightest markets. Industrial markets will remain robust throughout the region.

Among some of the highlights of the office markets forecast:

* Downtown Los Angeles should continue to recover despite corporate downsizings that prevented vacancy from dipping below 20% this year. By the end of 2001, the hefty amount of sublease space currently available should be absorbed, which will help drive down the market’s high vacancy rate.

* The Tri-Cities market of Burbank, Glendale and Pasadena will prosper through growth among existing tenants and by comparison with the Westside, where average rents are almost 12% higher. The vacancy rate dropped to 7% in the Tri-Cities during the year. Rents rose by 9% overall and jumped 17% in Burbank, which is as tight as the priciest Westside markets. Newly completed space may push vacancies up during part of 2001, but rising demand will keep the market tight.

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* Wilshire Center will improve further after gaining ground in 2000. The market’s vacancy rate dropped to about 17.5% and average rents moved up 6%. Factors driving improvement in 2001 will be its growing popularity among “dot-com” and media companies because of plentiful space, low rents and access to fiber-optic cable. “Its affordability will continue to be a major drawing card,” said Grubb & Ellis, “because [rents] can continue to rise and still undercut those of surrounding markets.”

* The sizzling Westside market will remain hot in 2001, but Internet-related leasing is expected to decline as many firms downsize or close their doors and fewer new companies enter the field. However, this turn of events will open space for entertainment firms and other media-related companies. Also, the traditional Westside tenant base of professional service firms and entertainment companies is expected to grow at an above-average pace.

* The South Bay markets will again benefit from the Westside space crunch that has drawn tenants to the LAX-Century Boulevard and El Segundo markets, where growth also is being driven by increased business at the ports of Los Angeles and Long Beach, growing air traffic cargo at Los Angeles International Airport and the movement of Internet and media companies to the area.

* In Orange County, the big question is whether the market can continue to improve despite slowing of the national economy. The answer is yes, Grubb & Ellis says, citing a “critical shortage” despite the nearly 5 million square feet of traditional and low-rise “flex-tech” office space that was completed this year. Although about 4 million square feet of new space is expected to be completed in 2001, Orange County is slowly running out of land for new offices, and developers will eventually need to focus on renovating existing space. Grubb & Ellis expects resurging Asian markets to further boost Orange County in 2001, especially in the high-tech sector.

In the region’s industrial markets, the demand for huge warehouses will get even stronger in 2001, which means more construction, more building sales and more leasing for markets such as the Inland Empire where there is plenty of land.

The Inland Empire industrial market, once much smaller than L.A. and Orange County markets, totals about 230 million square feet, about a quarter of the size of the L.A. industrial market and 50 million square feet more than Orange County.

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By contrast, Central Los Angeles became a victim of its own success this year as booming demand collided with lack of supply to result in a major decrease in sale and lease activity. The amount of available space may increase slightly during 2001, but not for long because the few construction projects that are completed will be snapped up by eager tenants.

Orange County’s industrial sector enjoyed explosive activity in 2000 and can look forward to steady momentum for most of next year after a relatively slow start. Demand will again outpace the addition of newly constructed space, the forecast predicts, and as a result, companies may be forced to look outside of Orange County for affordable, quality space.

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Office Rental Outlook

Demand for office space should remain strong in Los Angeles County in 2001. Grubb & Ellis also predicts rising rents and moderately paced new construction.

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Office Market/Class A Lease Rate per Square Foot per Month: Downtown: $2.34

Total Vacancy Rate: 21.7%

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Office Market/Class A Lease Rate per Square Foot per Month: Wilshire Corridor: $1.38

Total Vacancy Rate: 17.2%

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Office Market/Class A Lease Rate per Square Foot per Month: San Gabriel Valley: $1.98

Total Vacancy Rate: 17.2%

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Office Market/Class A Lease Rate per Square Foot per Month: South Bay: $2.30

Total Vacancy Rate: 11.5%

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Office Market/Class A Lease Rate per Square Foot per Month: West San Fernando/Conejo valleys: $2.17

Total Vacancy Rate: 10.4%

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Office Market/Class A Lease Rate per Square Foot per Month: Burbank/Glendale/Pasadena: $2.50

Total Vacancy Rate: 7.4%

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Office Market/Class A Lease Rate per Square Foot per Month: West L.A.: $2.98

Total Vacancy Rate: 6.2%

Source: Grubb & Ellis

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