Office Rents in L.A. Decline in 1st Quarter
The Los Angeles office market probably won’t rebound until next year as leasing activity and rents remain relatively flat, brokers say.
The office vacancy rate in Los Angeles County dipped to 18.1% in the first quarter, from 18.6% a year ago, according to Cushman & Wakefield, one of the nation’s largest commercial brokerages.
Landlords filled more space by cutting prices: the average lease rate was $2.13 per square foot per month, down from $2.19 in the 2002 first quarter.
“There’s not a lot of tenant demand,” said Joseph Vargas, Cushman’s senior managing director in Los Angeles. “Corporate America has capital constraints and people are staying on the sidelines.”
Until the economy improves, many business owners are reluctant to expand, contributing to a net loss of 372,000 square feet of occupied office space in the county during the first quarter. The bulk of lease transactions taking place are renewals or renegotiations of existing leases -- often for terms of two or three years, instead of the usual five years or more, Vargas said.
Tenants who want shorter leases may be trying to keep their options open to move when the economy improves, he said. Or they may be betting that rents will fall further in the near term. Landlords often agree to shorter leases with the hope of raising rents in a few years or because they simply want to keep tenants in their buildings.
Real estate investment trusts, which are some of the largest landlords in the region, are particularly motivated to show high occupancy in their buildings because they must file public performance reports, said Lisa St. John, managing director at Jones Lang LaSalle, a Chicago-based real estate brokerage. Many REITs are willing to shave their rents to attract tenants, thereby holding rents down across the board.
“Keeping occupancy up is more important than getting another 10 cents” a foot on rent, she said.
The good news for landlords, Vargas said, is that this dip in the real estate market should be less painful than the slump in the early 1990s, when the economy declined just as many new buildings were opening and the vacancy rate spiked to 23% in 1992.
The current 18.1% vacancy rate is up from the recent low of 12.7% in the third quarter of 2000. Large tenants’ subletting of space they aren’t using continues to be a drag on the market, St. John said.
In downtown Los Angeles, the vacancy rate was 19.6% with landlords asking for an average of $2 a foot.
The cities of Burbank, Glendale and Pasadena remained among the strongest markets in Los Angeles County with a first-quarter vacancy rate of 16.5% and rents of $2.09 per square foot, including sublease space.
Vacancy on the Westside was more than 18% with landlords asking for an average of $2.73 per square foot. Wilshire Center had a 16.1% vacancy rate at $1.68 per square foot.
South county markets including Long Beach, Torrance and El Segundo showed a 19% vacancy rate at $1.92 per square foot in rent.
The west San Fernando Valley including Woodland Hills was 16.8% vacant at $2.12 a foot. The central Valley, from Sherman Oaks to Newhall, was 11.2% vacant at $1.92 a foot. The north Valley, which includes Calabasas and Simi Valley, was 16.3% vacant at $2.06 a foot.
In the San Gabriel Valley, 15.9% of the space was vacant with landlords asking for $1.75 per square foot.
Downtown is perhaps best poised for recovery, the Cushman & Wakefield report said, with the potential for between 700,000 and 1 million square feet of new leasing in 2003.
US Bancorp is expected to take as much as 180,000 square feet at Library Tower, most of which was once occupied by defunct accounting firm Arthur Andersen. Other potential downtown tenants include City National Bank, said to be looking for more than 300,000 square feet, and SBC Communications Inc., which wants to relocate 300,000 square feet from west of the Harbor Freeway.
Downtown landlords haven’t had to drop their asking rents much in the last two years, said Mark Sullivan, managing director of real estate brokerage Julien J. Studley Inc. “Downtown didn’t slide as much as the Westside has,” he said.
Many of the best buildings in Century City and Westwood are no longer able to charge a premium over downtown rents for similar quality buildings, Sullivan added.
Large investors continue to view the county office market with high regard, said Kevin Dretzka, managing partner of Century City real estate investment banking firm Eastdil, which was involved in some of the largest office sales in Los Angeles County in the last year.
“Southern California remains one of the brighter lights from a fundamentals standpoint,” Dretzka said. It suffered less than other markets from the dot-com collapse and its diversified business base of service and professional tenants has allowed it to ride out flat economic times fairly well.
“We’re considered by most investors to be ranked ‘outperform,’ ” he said.
