In L.A. Area, a Role Reversal in Vacancy Trends
The downtown Los Angeles and Westside office markets switched their long-running roles during the fourth quarter, with the downtown market improving and the Westside market turning in an uncharacteristically poor performance attributed to the “dot-com” shakeout.
The downtown market filled nearly 365,000 square feet more office space than it emptied during the quarter, while the Westside emptied almost 472,000 square feet more space than it filled, Cushman Realty Corp. reported.
Another brokerage, Grubb & Ellis, reported the amount of occupied office space declined by more than 645,000 square feet on the Westside during the quarter.
“I think the fourth-quarter numbers show that downtown Los Angeles is recovering slowly and will continue to recover slowly,” said broker David Thurman of Grubb & Ellis.
The decline in the amount of occupied space on the Westside is probably a one-time occurrence, Thurman and other real estate professionals say, not a sign of any fundamental weakness. The Westside remains one of the tightest office markets in Southern California.
Brokerages track the gain or loss in total occupied space in different office markets. A gain is known in commercial realty circles as absorption, while a loss is called negative absorption.
Downtown L.A. in the fourth quarter led all office markets in Los Angeles County in absorption, the Cushman report said, noting that the San Fernando Valley placed second with absorption of more than 200,000 square feet.
Despite downtown’s good fourth-quarter performance, the office market there still has one of the region’s highest vacancy rates, Cushman reported, approximately 23% of the market’s approximately 32 million square feet.
By contrast, the overall vacancy rate is about 8.3% for the markets that make up the Westside, which is estimated from 40 million to 50 million square feet, depending on which brokerage’s geographic definition is used.
Real estate experts say the Westside is healthy because any office vacancy rate below 10% reflects a strong market, while those with rates above 15% are considered weak.
Tighter vacancy rates help Westside landlords command considerably higher rents than in downtown L.A. for comparable space. Average asking rents for office space ranged from $2.42 to $2.98 per square foot a month on the Westside at the end of 2000, and from $1.67 to $2.34 in downtown Los Angeles, according to Grubb & Ellis.
Top-quality offices typically rent for well past $3 per square foot per month on the Westside, but some quality downtown space can be had for as little as $1.50 per square foot per month on a sublease basis.
The space that was emptied out by dot-com tenants on the Westside shouldn’t be much of a problem for landlords to fill, Thurman said. He thinks the availability of the space could actually be good for the market, producing a leveling off of rents that have been rising in recent years.
Downtown’s lower rents are likely to attract more tenants, brokers maintain, but low prices alone won’t be enough to lure businesses that prefer the Westside for its shopping, restaurants and other amenities--and because many of the businesses’ executives and employees live on or near the Westside.
The Westside’s popularity is reflected in Cushman Realty’s statistics for the full year 2000, which show that the Westside led the Los Angeles region with absorption of more than 1.1 million square feet of office space.
The Tri-Cities market of Burbank, Glendale and Pasadena came in second at more than 894,000 square feet of absorption and the San Fernando Valley finished with nearly 800,000 square feet absorbed. Downtown Los Angeles ended the year with absorption of just over 92,000 square feet.
