Rents soften in hard times
The lousy economy continues to quash the commercial real estate market, driving down rents and pushing out tenants.
Nearly a third of office space is flat-out empty in parts of Los Angeles, Orange, Riverside and San Bernardino counties. A fifth of the offices are empty in the once-crowded Burbank Media District.
Viewed just months ago as far less responsive to the troubles that sank the housing market, commercial real estate is in such a profound slump that the sector’s woes could threaten a broader recovery.
“The statistics are alarming,” said Joe Vargas, senior managing director of real estate brokerage Cushman & Wakefield. “And the turnaround could potentially be some time away.”
The sector is deeply connected to several troubled parts of the economy, including the frozen credit markets and the small retailer who can’t make his rent.
As a result, companies are moving out of buildings, not into them. Tenants who continue to rent are demanding -- and getting -- discounts.
Los Angeles County landlords are asking for an average of $3.08 per square foot per month for Class A buildings, down 5% from a year ago, according to Cushman & Wakefield, which tracks activity on a quarterly basis. In Orange County, rates plunged even more, with office building rents down 16%, to $2.61 per square foot.
Some upscale markets have seen even more dramatic drops.
“Tenants have the ability to trade up to better buildings,” said broker Bob Safai of Madison Partners.
In desirable Santa Monica, for instance, landlords eager to keep their buildings occupied have dropped their average asking price almost $1 a foot, to $4.74. Such reductions have spurred more lease deals lately, Safai said, but further landlord discounts are probably coming.
“The Westside still has some softening to do,” he said. “All markets do.”
Tenants can demand lower rents because landlords have so many empty spaces.
Overall office vacancy in Los Angeles County jumped to almost 16% in the second quarter, from 11% a year earlier, according to the Cushman & Wakefield report. In Westwood, a perennial favorite of Westside professionals, 18% of office space is vacant.
Vacancy at the John Wayne Airport area, home to many white-collar Orange County firms, reached 21%. Ontario, the heart of the Inland Empire office market, has 29% vacancy.
Part of the problem in Orange County and the Inland Empire is that developers built way too much office space during the boom, and now the market in those places is flooded.
But even in downtown Los Angeles, where the last major office building was completed in 1992, vacancy rates rose to 16%, from 13% a year earlier. More than half a million square feet of office space has been vacated downtown this year.
The picture is also grim with regard to industrial space, including factories, workshops and warehouses.
Los Angeles County industrial vacancies averaged about 5% in the second quarter and could hit 10% by the end of this year, said Dwight Hotchkiss, another Cushman & Wakefield senior managing director.
The number of leases being signed has dropped as much as 50% from last year even though rents are down about 17%, he said. “Many companies have shut their doors.”
Vacancy is more than 20% in some parts of Riverside and San Bernardino counties, where landlords provide large distribution centers for companies that bring goods through the ports of Los Angeles and Long Beach.
Because of the slow economy, such imports have declined substantially for several months.
Experts do not expect the region’s market for office or industrial space to recover any time soon. Commercial real estate is a lagging indicator of the economy that will not come back until well after the job market does.
Safai of Madison Partners predicts that the real estate market will roar again, but maybe not for three more years.
“Everyone thinks that the market will take five years to recover from a downturn,” he said. “We’re already two years in.”