Office lease market shows signs of a recovery

After three years of decline in the office leasing business, the worst is over, landlords and brokers said.

Companies that hunkered down during the economic slump may not be doing much hiring yet, but many were confident enough about their futures to sign office leases in the first quarter, brokers said. In addition, attractive rental terms spurred deals across Southern California.

"The general feeling is that we have arrived at a plateau and things have become more predictable," said broker Mark Sullivan of Studley. "And when things are predictable, you tend to see more activity."

More than 5.5 million square feet worth of leases were signed in the first quarter, a 37% increase from the same period in 2010, according to a report by brokerage Cushman & Wakefield.

That still wasn't enough to end the long slide in occupancy, however, as overall vacancy in Los Angeles, Orange, Riverside and San Bernardino counties rose to 19.5% from 18.9% a year ago.

Rents also continued down as landlords cozied up to tenants in a competitive marketplace. Average asking rents were $2.31 per square foot per month, a 9 cent drop from last year's first quarter.

"We are very much in a tenant's market and will be very much in a tenant's market perhaps through the third quarter of this year," said Joe Vargas, an executive vice president at Cushman & Wakefield. "There is a lot of vacancy that has to be eaten away."

While an economic recovery is underway, hiring so far has been insufficient to drive many tenants to expand their offices. Frequently, brokers say, when tenants renew their leases they are taking less space than they had a few years ago because they have downsized or are fitting employees into smaller work spaces.

That pattern puts pressure on landlords, who "are getting more and more aggressive," said broker Whitley Collins of Jones Lang LaSalle. "Landlords are desperate to get new tenants because there is so little demand."

Nearly every lease signed in the last three years was a renewal, Collins said.

Landlords dropped rents to prevent tenants from leaving and few tenants have wanted to spend what it takes to move. It routinely costs from $55 to $125 per square foot to prepare new offices for occupancy, not including desks and furniture. Even with a generous contribution from the landlord for space improvements, upfront costs can be substantial.

As the economy recovers, though, more tenants will be willing to take on moving costs to trade up to a better office building or preferred location, brokers said.

"We will see tenants move, but it doesn't mean the market will be a lot stronger," Collins said. "This is as soft as I have seen the market since 1991 or 1992." He predicted the office leasing industry will remain weak for three years or more.

Some landlords are more optimistic. In downtown Los Angeles, one of the region's largest office markets, building owners have been raising rents slightly — but getting more generous with concessions such as periods of free rent for signing a lease, brokers said.

The net cost to tenants is about the same, but landlords may find it easier to reduce concessions in the future than raise rents further, brokers said. Higher rents also make a building more desirable to potential investors.

One downtown landlord betting on growth is Bert Dezzutti, senior vice president of Brookfield Office Properties.

"I do see the beginning of a recovery," Dezzutti said. "We expect modest hiring in the central business district."

Brookfield, which owns several high-rise office buildings in Los Angeles County, started work this month on a $40-million renovation of its shopping center at Figueroa and 7th streets.

"We desire to grow here because we think it will be a dynamic downtown that will exceed people's expectations for it of the last 20 or 30 years," he said. "Its time has come."

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