Businesses pinched as commercial rents soar in Southland

Times Staff Writer

Sizzling demand for offices, warehouses and retail space is hitting Southern California and other major urban centers. That is resulting in smaller cubicles and longer commutes for workers, higher prices for consumers and closure of businesses unable to meet landlords’ demands for higher rent.

Office rents have climbed more than 25% on average in the last three years in much of Los Angeles County. In some of Orange County’s thriving office parks, rents have risen by more than 50% in that period, with the Irvine Spectrum posting the region’s biggest average jump, at nearly 57%, according to a recent report from real estate brokerage Cushman & Wakefield.

Rents on hot retail strips such as Melrose Avenue, Rodeo Drive and Robertson Boulevard have more than doubled in the last two years.

Vacancies have plunged to well below 10% in many areas, making it harder for businesses to find space. Only 3% of the region’s industrial space -- used for warehouses and factories -- is available, a level that is considered drastically low.

Shoe store operator Young Moon shuttered the Santa Monica branch of his O’ My Sole chain in December when his rent went up and said he planned to boost prices as much as 6% at his seven other Southern California stores this year to help meet higher rent charges.


“Rents are too high,” he said.

While the residential real estate market has flattened, a strong global economy is boosting demand worldwide for space for offices, warehouses, retailers and other businesses. In Southern California the market is particularly tight, in part because of a lack of available land and regulations that have made it difficult for developers to construct office or industrial buildings.

Surging international trade through the region’s ports is pushing up demand for warehouses to hold and distribute goods.

In the Inland Empire, where relatively more raw land is available for construction, hundreds of thousands of square feet of warehouse and distribution buildings are being built every year -- and nearly all of them are leased or sold.

“There is no historical precedent for this,” said broker Jim Center of commercial real estate firm Grubb & Ellis.

Faced with a rent increase of about 60% to keep his offices near Ontario Airport, Carlos Lacambra was prompted to search for new digs to house the 160 workers at his branch of A-Check America, a business that does background checks and drug tests for employers.

After a long search, he moved the office in January into a rented building in east Riverside that he expects to eventually buy.

The move came at a cost in personnel, however. As he had feared, almost a third of his employees quit because the additional 20-mile commute from Ontario to Riverside was too far for them. He paid bonuses to some workers to stay on longer while he hired replacement employees in Riverside.

“We lost some very good people we wanted to keep,” Lacambra said. The move “was a calculated risk we had to take.”

Higher rents also are the result of economic redevelopment that is transforming some neighborhoods into more upscale shopping and entertainment venues. The waves of change that swept through Santa Monica and Old Pasadena years ago are now being felt in other older districts such as Hollywood, Culver City, Alhambra and downtown Los Angeles.

Shopkeepers in many of these changing retail districts are feeling pinched.

Even though the family-style Italian fare at Jay Handal’s San Gennaro Cafe made it one of the most popular restaurants in Culver City, Handal shut down the eatery a few months ago when his landlord nearly tripled the rent as his lease expired.

“I couldn’t afford it,” he said.

Moving into San Gennaro’s space will be a more upscale, all-organic restaurant run by celebrity caterer Akasha Richmond.

“There is going to be an attrition factor,” said Handal, who also operates a restaurant in Brentwood. “Small business today is being squeezed out of the market. You’re not going to have many family-friendly community restaurants -- only big guys with deep pockets.”

In Hollywood, storefront food joints as well as longtime shopkeepers who sell knickknacks to tourists are giving way to high-end bars and boutiques. An outlet of Hamburger Hamlet, a Hollywood Boulevard mainstay, closed last month and will be replaced by trendy Swedish apparel retailer H&M.;

Neighborhood activists will rally next week in Larchmont Village to try to prevent the loss of a popular restaurant and other local businesses threatened by rising rents.

In Culver City, the city spent more than $60 million over the last decade on public improvements largely intended to attract new restaurants and businesses, said Kellee Fritzal, economic development administrator.

The plan appears to have worked. Demand among merchants is high enough that average store rents have jumped from $1.85 per square foot per month to $4.50 in the last three years.

Rents across the region are going higher for other reasons too. Because property values have been rising with increased sales, property taxes have more than doubled on many buildings in recent years. Most leases allow landlords to pass those higher costs along to tenants.

Rents also are rising because investors with deep pockets have scooped up vast collections of buildings with the expectation that businesses will continue to expand and values will continue to rise. Just last month, for example, Los Angeles developer Maguire Properties Inc. announced it would pay almost $2.9 billion for 24 office buildings in Orange County and downtown Los Angeles. Maguire and other buyers are expected to raise rents to recoup some of their investments.

Maguire executive Bill Flaherty predicted that landlords in downtown L.A. office buildings would soon boost rents by double digits, following a pattern set in the last two years as available office space dwindled in Orange and San Diego counties.

“When rents increase, they increase in a spike,” Flaherty said. “Absolutely, rents are going to go up.”

Rents here are still lower than in such dense urban centers as New York, San Francisco, London and Tokyo. But that is no consolation for businesses such as Blue Shield of California. Facing a rent increase, the health insurer decided to leave its prominent tower along the San Diego Freeway in Westchester for less expensive offices nearby on Sepulveda Boulevard by June. The move will save 30% in real estate costs over the next seven years, Blue Shield spokeswoman Elise Anderson said.

“We are a not-for-profit industry, and with rising healthcare costs, every penny matters, even our real estate overhead,” she said.

For landlords in the months ahead, the trick will be to figure out how high they can raise rents before tenants shun their buildings. Brokers said some landlords might have to lower their asking prices in a few months if they don’t find enough tenants willing to pay the new rates.

“The market will take care of itself,” said broker Rafael Padilla at Par Commercial. And some tenants are never going to be happy, he added. “I have yet to meet a tenant who is not complaining about what they are paying.”



Lease hikes

Percentage change in office rents from 2003 and average monthly rates in 2006

*--* Market/Pctg. Rate change (Per Sq. ft.) Irvine Spectrum 56.9% $3.17 Valencia/Newhall 41.7% $2.72 Costa Mesa 39.1% $2.99 Santa Monica 33.2% $4.09 Westwood 28.7% $3.77


Source: Cushman & Wakefield


Office rents

Average monthly rate in 2006 and percentage change from 2003

*--* Rate (Per Pctg. Market sq. foot) change West Hollywood $3.33 28.6% Sherman Oaks 2.65 27.4 South Santa Ana 2.75 24.4 Woodland Hills 2.40 19.4 Pasadena 2.78 18.8 Downtown L.A. 2.64 17.9 Downtn. Burbank 2.36 14.0 San Bernardino 1.91 12.4 Riverside 2.13 10.9 Ontario 2.11 8.8 Glendale 2.53 5.0 Downtown Long Beach 2.18 3.8 Century City 3.21 3.6 Beverly Hills 2.95 -3.3


Source: Cushman & Wakefield