County Office Vacancies, Rents in a Balancing Act

Los Angeles County office vacancies declined slightly and rents mostly held steady in the first quarter as the market continued to show signs of firming up.

The overall vacancy rate, including space available for sublease, was 17.1%, down from 18.1% in the first quarter of 2003, according to a report by real estate brokerage Cushman & Wakefield. The average rent was $2.06 a square foot per month, down 2 cents from a year ago.

Leasing activity has been moderate over the last year as the market slowly digs its way out of a surplus of space that dates to the dot-com collapse and the 2001 recession.

“Vacancy will continue to be pushed down and rents will push up” in the months ahead, predicted Joe Vargas, Cushman’s senior managing director in Los Angeles.

For now, Los Angeles County is still a tenants’ market, especially on the Westside, where average rent fell 15 cents, to $2.58 a square foot, from a year earlier. The vacancy rate on the Westside also fell, to 16.8%, from 18.1%.

Rents generally creep up as vacancies go down. The two moved in tandem last quarter on the Westside because many owners stopped holding out for the rents they’d hoped to get, said real estate broker Rick Buckley of Madison Partners, who represents tenants in lease negotiations.

“There is a smaller gap between landlord expectations and tenant expectations,” he said.

Helping close that gap in the year’s first three months were some large deals that set lower rent benchmarks, he said. Among them was an agreement by Fremont Investment & Loan for 60,000 square feet at the Water Garden in Santa Monica, one of the Westside’s premier office complexes. Real estate sources said Fremont had agreed to pay $2.65 a square foot and received eight months’ free rent plus an allowance to help prepare the space for occupancy.

Downward pressure on Westside rents will spread to nearby markets such as Culver City and El Segundo, where many tenants landed after being priced out of Westside neighborhoods including Westwood and Century City during the boom of the late 1990s, Buckley said. With many five-year leases coming to a close, landlords in nearby markets may have to reduce rent to prevent tenants from bailing out, he said.

Landlords, however, are trying to hold the line on rents and are looking for other ways to offer incentives to tenants, said Patrick Lacey, a vice president at Trizec Properties Inc., one of the nation’s largest office property owners. Such incentives might include free or reduced-rate parking.

Lacey predicted that Westside rents would stabilize and then increase by year’s end. “There will always be a demand for that market,” he said.

Vacancies in downtown Los Angeles, the next-largest market after the Westside, came down slightly more than 1 percentage point to 18.3% as the average rent rose 7 cents, to $2.07 a square foot.

Trizec owns more than 1 million square feet downtown and is “very bullish” on the market, Lacey said. “A lot of people who once avoided downtown now are feeling positive about it,” he said.

The housing construction boom, recent additions such as Disney Hall and a wave of office building sales at escalating prices are contributing to a better image of the central business district, Lacey said.

The county’s weakest major markets in the January-March period included the office district around Los Angeles International Airport, where the vacancy rate was 30% with an average rent of $1.43 a square foot, and downtown Burbank, with a 31% vacancy rate and average rent of $1.98 a square foot.

Burbank’s nearby Media District was one of the strongest markets, with a 7.9% vacancy rate and average rent of $2.70 a square foot.