Southland Office Rents Are on a Sharp Upswing

Companies leasing office space in Orange and Los Angeles counties are paying rents nearly 50% higher today than they did five years ago, a mark of the region’s continued prosperity but also an indication that the cost of doing business in the two counties has increased substantially since the real estate recovery began in 1995.

As a result, real estate experts say, a growing number of companies are relocating to less-expensive offices and more start-up firms are opting for what’s affordable rather than what’s in vogue.

Average asking rent for office space has increased nearly 47% to $2.04 per square foot per month in Orange County since 1995, according to a Grubb & Ellis survey. It is the highest price the company has ever recorded for the county.

In Los Angeles County, the average asking rent has increased more than 46% to $2.06 per square foot per month, according to the Grubb & Ellis study.

The study showed that office rents began rising steadily in both counties in 1995 and have continued climbing ever since. During that same time, rents for industrial space have risen 42% in Orange County and 39% in Los Angeles County, the survey showed.

In fact, the Orange County market is so strong that Grubb & Ellis has revised upward its projections for lease rates, which it said could reach $2.10 per square foot later this year.

“People are still bullish,” said Craig Jones, the company’s research director.

Cheaper rents and available space have prompted a growing number of local companies to turn away from sophisticated campaigns, such as those for the Irvine Spectrum business park, and relocate in Aliso Viejo.

The unincorporated community, which hardly markets itself, has drawn an impressive array of companies that includes engineering giant Fluor Corp., chip maker QLogic Corp. and online retailer Buy.com Inc.

In Los Angeles County, higher rents recently drove start-up company YouSync.com to move into space at 5959 W. Century Blvd. in Westchester rather than any of the pricey Westside markets that are popular with “dot-com” companies, according to Julie Liu, a founder of the company.

Liu said YouSync, which is developing software applications that Fortune 200 companies can access via the Internet instead of maintaining the applications on their own computers, also wanted offices close to Los Angeles International Airport for convenient access to Silicon Valley.

Liu and co-founder Robert Dye initially considered space in El Segundo, she said, but they found that at more than $2 per square foot per month it was too expensive for their rent budget of $1 to $1.75 per square foot. On Century Boulevard, which has long had a reputation as a “tenants’ market” with substantial vacancies, YouSync is paying about $1.25 per square foot per month.

“We’re in 16,000 square feet of space, paying the same as our peers elsewhere who have 5,000 to 8,000 square feet,” Liu said. “I don’t have to wake up every day worrying about where we’re going to put our next 30 to 50 employees.”

YouSync has about 22 employees now but expects to grow to 100 or more in the next year to 18 months, Liu explained, so having lots of extra space was important to the company.

Another new company that has opted for less expensive space is EStyle Inc., an online retailer of children’s and infants’ clothing and related merchandise, which is renting 20,000 square feet of offices at 865 S. Figueroa St. in downtown Los Angeles.

EStyle initially was required to lease space in downtown L.A. under terms of its funding agreement with Zone Ventures, according to Sucharita Mulpuru, EStyle’s marketing director.

The firm has elected to stay in downtown L.A. even though it’s no longer required to, Mulpuru said, and cheaper rent is one of the chief reasons for the choice--along with downtown’s central location.

Many dot-com companies have chosen Santa Monica and other Westside markets that are perceived as “really cool,” Mulpuru added, but EStyle was more concerned with conserving cash by reducing rent. Some asking rents in downtown L.A. are still under $2 per square foot per month, compared with $3 to $4 in popular Westside markets.

“Tenants are now being more thoughtful about where they’re going,” said Kirk Belsby, a real estate partner at consulting firm Arthur Andersen. “I think downtown Los Angeles is now getting a longer look [from businesses searching for office space] than it used to because there is such a disparity between downtown rents vis a vis the Westside and Tri-Cities [Pasadena, Burbank and Glendale].”

Another company that recently chose downtown, accounting firm RGL Gallagher, moved from the Miracle Mile district of Los Angeles to save money on rent, for better freeway access, and to be closer to clients, according to Mark Shaffer, a real estate broker at Colliers Seeley.

Gallagher is paying about $1.85 per square foot per month at 650 S. Figueroa St., compared with rent that would have risen to about $2.20 to $2.50 per square foot if the firm had remained in Miracle Mile, Shaffer said.

Real estate experts say the region’s rising office rents are generally a positive sign because they indicate a strong demand for office space from growing businesses and a steadily rising contribution to the regional economy.

With approximately 161.5 million square feet of office space in Los Angeles County and 54.6 million square feet in Orange County, the companies leasing that space are pumping hundreds of millions of dollars into the regional economy each year in the form of rent.

But rent is typically the second biggest expense for most companies, so rising rents also represent a hike in the cost of doing business for those companies.

Payroll is the largest expense for most firms, representing about 40% of a company’s annual budget, whereas most businesses try to keep rent below 10% of their costs, Belsby said.

While rising rents are a concern for any cost-conscious company, Belsby said, many businesses today are less affected by rent hikes than they might have been in the past because they are using less space per worker.

“When we used to do feasibility studies for proposed office buildings as recently as 10 years ago, it was not atypical to use 250 to 300 square feet as the standard amount of space per person,” Belsby said. “Now, because of technology and the way we use our space, that number is closer to 150 to 200 square feet per person.”

Many professional service companies like accountants and consultants use even less space per employee because they have adopted “hoteling” systems that enable workers to share desks and office space because not everyone comes into the office every day, Belsby said.

Changes like hoteling are part of a trend in which “users of office space are getting much more creative” in figuring out how to do more with less space and how to otherwise reduce rent, said Stuart Gabriel, director of the USC Lusk Center for Real Estate.

Many companies have already moved back-office operations like data processing and telephone call centers to cheaper locations in other states, Gabriel noted. These and other changes in the ways companies use office space mean that “the old rules of thumb are much less reliable” in estimating future demand for space, Gabriel said.

Even with their rising rents, Gabriel pointed out, rates in Los Angeles and Orange counties are a bargain compared with the cost of office space in San Francisco and New York, where rents can run two or three times more.

“One reason you’ve seen the development of the biotech industry in Orange County and the 101 Technology Corridor [in the San Fernando and Conjeo valleys] is that rents in Silicon Valley are so high,” Gabriel said.

Nonetheless, rents in L.A. and Orange counties are high enough to be worrisome for some.

“You’re seeing more activity in the Riverside and San Bernardino office markets” as a result of rising rents in L.A. and Orange counties, said Jack Kyser, chief economist with the Los Angeles County Economic Development Corp.

Rising rents are “driving some very interesting decisions about where to locate,” Kyser said, noting that dot-com companies “are looking at the bottom line a lot more closely than they used to” because venture capitalists are doling out dollars more judiciously than they did just a year or two ago.

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Rent Hike

Tenants in Orange County office buildings are paying nearly 50% more for space than they did five years ago, while industrial rents are up more than 40% as the real estate market continues to improve for landlords.

Office space (In dollars per square foot): 2000: $2.04 per square foot

Industrial space (In dollars per square foot): 2000: 54 cents per square foot

Source: Grubb & Ellis