South Bay Market’s Variety Softens Blow of Slowing Economy
After massive aerospace cutbacks and the recession of the early 1990s, the South Bay’s commercial real estate market remade itself and rebounded strongly by attracting a more diverse and entrepreneurial group of tenants.
Now, landlords and real estate investors are counting on that diversity to soften the effect of a slowing economy. The sprawling South Bay’s office and industrial occupancy rates have slipped noticeably in recent months--but the declines pale in comparison with the decade-ago free fall.
A wide range of new firms and industries--including Hollywood sound stages, multimedia, Internet firms and logistics companies--have been attracted to the South Bay’s relatively affordable commercial rents and its proximity to the airport, harbor and beach communities. It is one of the county’s largest real estate markets after downtown and the Westside.
“Our economy is much more diverse, and we are not as dependent on aerospace,” said Kirk Johnson, president of real estate operations for developer Watson Land Co. “Things are in much better shape.”
After a record pace of leasing in 2000, the South Bay market, which includes a wide swath stretching from El Segundo to San Pedro, has experienced a significant drop in demand for office and industrial space.
In addition to slack demand, the market is also struggling to fill a large number of new buildings that were conceived when rents were rising rapidly and vacancies extremely low. During the third quarter of 2001, about 400,000 square feet of office space and nearly 2 million square feet of industrial space were under construction, according to broker Grubb & Ellis Co.
As a result of weakening demand and large amounts of new space, the South Bay’s office vacancy hit nearly 15% in the third quarter, up from about 10% in the same period last year, according to Cushman & Wakefield. The third-quarter industrial vacancy rate also climbed, increasing to 4.6% in the third quarter from 3.3% in the same three-month period in 2000, Grubb & Ellis said.
In comparison, the third-quarter office vacancy rate for Los Angeles County rose to 15.4% from 13.6% in the same period last year, according to Cushman & Wakefield. Countywide industrial figures were not available.
“The manufacturing deals are just not happening,” said Jeffrey S. Morgan, an industrial real estate broker at CB Richard Ellis.
In the El Segundo area, developer Overton Moore Properties has two office projects totaling nearly 400,000 square feet under construction. Neither development--the Douglas Technology Center and Crosspointe--has signed any major tenants.
“The market has no doubt slowed down,” said company Senior Vice President Rooney Dachbach.
Johnson of Watson Land said demand has been slow to materialize for two industrial buildings under construction at the firm’s Dominguez Technology Center in Carson. Earlier phases of the center were almost entirely leased out well before they were completed.
“The people who were out looking have put things on hold,” Johnson said.
Johnson and other South Bay real estate veterans point out that the area’s woes are much more manageable than those of the downturn in the early 1990s. At its worst, the office vacancy rate in hard-hit portions of the South Bay approached nearly 30% and industrial vacancies exceeded 10%.
“This downturn is much less severe than the one of the 1990s, which hit quicker and went much deeper,” said commercial real estate broker Jim Biondi at Grubb & Ellis.
The area’s troubles a decade ago were in large part the result of the retrenchment of aerospace and defense related businesses, which occupied nearly half of all commercial real estate during the late 1980s, according to industry observers. Now, aerospace firms--primarily engineering and research operations--account for about a quarter of the market, with the remainder split up among other high-technology firms, trade and distribution centers, businesses services and other tenants groups.
At the Continental Park office complex in El Segundo, aerospace tenants account for only 20% of the space versus 70% in the early 1990s, said Richard Lundquist, president of Continental Development Corp., which owns the nearly 3-million-square-foot office complex on Rosecrans Avenue.
The area’s more diverse tenant mix has helped keep Continental Park’s vacancy rate well below 10% and is expected to fill a new 270,000-square-foot office building under construction, Lundquist said.
“The South Bay is better positioned than a lot of other areas,” he said.
Lundquist and others say a defense industry buildup could once again trigger an expansion of aerospace tenants. But that expansion probably will not help fill vacant space in the short term, and its long-term benefit to the South Bay is still uncertain.
“It’s really hard to say and forecast what the demand is going to be from the aerospace sector,” said Biondi at Grubb & Ellis. “It’s just to soon to tell.”
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Rising Vacancies
Industrial and office vacancies have been rising across the South Bay, but a diverse tenant base should help prevent a severe decline.
(Quarterly Vacancy Rates)
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3rd Qtr 1st Qtr 2nd Qtr 3rd Qtr 2000 2001 2001 2001 South Bay Office 10.1% 10.9% 14.4% 14.9% South Bay Industrial 3.3% 4.0% 4.4% 4.6%
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Sources: Cushman & Wakefield, Grubb & Ellis
