Office Space Prices Sinking in Southland
Businesses looking for office space in Southern California can find cheaper deals now than in the last four or five years, and those deals could get even better in coming months.
This year’s economic slump has slowed demand for office space, commercial real estate brokers say, while the supply of available space has grown because of business failures and consolidations.
What was clearly a landlords’ market before the economy started to slow, brokers say, has turned into a tenants’ market.
“There are more spaces available now than there are tenants looking to fill them,” said broker Matthew Miller of Cresa Partners.
One of the most dramatic examples of change is Los Angeles County’s Westside.
“Landlords who were turning away $3.50-per-square-foot [per month] deals a year ago on the Westside would be lucky to do the same deals today at $2.25,” Miller said.
Among the factors driving down rental rates is the abundance of space available for sublease from tenants who no longer need it and are willing to sublet it at a discount to cut their losses.
The plush Water Garden office complex in Santa Monica was commanding rents of $4.10 to $4.25 per square foot per month at the peak of the market last year, Miller said, but some sublease deals have been signed there recently at $1.80 in fully furnished suites.
When sublease space is widely available, it pressures landlords to either lower their rates to remain competitive or hold the line and hope the market will soon improve.
Sublease space on the market has increased dramatically in Southern California in the last year--by 55% in Los Angeles County and almost 65% in Orange County.
Brokerage Cushman & Wakefield says that in Los Angeles County, 5.6 million of the total 175 million square feet in office inventory was available as sublease space at the end of the third quarter, up from 3.6 million a year ago.
In Orange County, 1.6 million of the county’s 62 million square feet of office space was available for sublease at the close of the third quarter, up from 971,000 a year ago. Sublease space is increasing because “tenants are shrinking,” said broker Seth Dudley of Julien J. Studley Inc.
“Most of the tenants we are talking to are either giving up space or making no changes in their space requirements,” Dudley said. “I don’t see anything on the horizon that suggests there is going to be increased demand any time soon.”
Among tenants offering space for sublease is Woodland Hills-based WMC Mortgage Corp., which leases 100,000 square feet at the Trillium complex in Warner Center. WMC already has sublet 35,000 square feet of space to other companies and is hoping to sublet an additional full floor of 17,500 square feet, said George Eshaghian, a WMC senior vice president.
WMC is offering the space for $1.80 per square foot per month, Eshaghian said, compared with asking rates of $2.35 or more for comparable space offered directly by landlords in Woodland Hills.
Asking rates can be misleading, however, since they are often like the sticker prices quoted by auto dealers.
“Asking rates are actually still rising in the San Fernando Valley,” Dudley said, “but there is a wider spread now between asking rates and the rates at which landlords will do deals now than there has been for several years.”
Besides being more flexible on rental rates, Dudley said, Valley landlords are hinting that they might offer other concessions that haven’t been seen for a while, such as a period of free rent and higher allowances for tenant improvements. Some landlords also are reintroducing incentives, such as cash bonuses and free trips, for brokers who bring in tenants.
The changing office market doesn’t mean that tenants can dictate terms to landlords, just that they’re in a much stronger negotiating position than they have been in years.
“There’s always a kind of subtle dance between landlords and tenants in terms of where the power is,” Dudley said.
“It’s been tilted strongly in the landlords’ favor for most of the 1990s, but since the fourth quarter of last year it has been tilting back toward tenants.”
In Orange County the partners are dancing pretty far apart, according to Colliers Seeley International broker Tim Joyce, with each expecting to strike better deals than the other is willing to offer.
“The pendulum has swung back toward tenants,” Joyce said, “but it has not swung back to anywhere near the kind of tenants’ market we had in the early 1990s.”
Some Orange County landlords are offering small concessions such as a month or two of free rent, he said, and landlords are less insistent about obtaining letters of credit or larger security deposits from tenants who lack top-notch credit ratings.
A possible exception to the change in the market’s direction is in downtown Los Angeles, where Cresa Partners broker Kathy Porter and John Eichler, director of client services for Cushman & Wakefield, both say the market is trending toward equilibrium between tenants and landlords after strongly favoring tenants for many years.
“Downtown L.A. certainly isn’t a landlords’ market,” Eichler said, “but it is less of a tenants’ market today than it was on the first of this year.”
Despite the softening of the Southern California office markets, Miller of Cresa Partners said, many landlords are holding the line on rents because they believe demand for office space will grow before long. Miller, however, thinks rents will fall further before they climb again.
Either way, Los Angeles landlords are in better shape than those in many parts of the country, especially those in downtown San Francisco’s South of Market district, where the bottom fell out when scores of dot-com tenants went under.
“Landlords there could cut their rates in half,” Miller said, “and still not get any deals done.”
