The financial meltdown on Wall Street is having a ripple effect on Los Angeles County’s office market, which could see millions of square feet of space quickly open up for lease.
Initial tallies indicate that nearly 8 million square feet of office space could be at risk.
The figure represents only about 4 percent of the county’s 189 million-square-foot office market, but the damage could be significant in places like Century City, downtown and parts of the San Fernando Valley where there are concentrations of distressed firms.
Moreover, it all comes as the office market has softened after years of rising rents. The countywide vacancy rate hit 10.8 percent in the second quarter, more than a point higher than a year earlier.
“In an ordinary market we’d probably be able to reabsorb a lot of the space. However we are in a generally soft economy, so that is going to be a challenge,” said Paul Habibi, a real estate lecturer at the UCLA Anderson School of Management. “It would most likely lead to a noticeable decline in rental rates and vacancies would tend to spike as a result.”
Bankrupt Lehman Bros. Holdings Inc., bailed-out American International Group Inc. and Merrill Lynch & Co. Inc., which was recently acquired by Bank of America Corp., hold leases for prime space in Century City and downtown.
And any of that space that hits the market would follow what has already been dumped by Countrywide Financial Corp., which also was acquired earlier in the year by Bank of America. In addition, federal regulators that have seized Pasadena’s IndyMac Bank are expected to break leases on dozens of branch sites across the region.
Givebacks could come as the troubled companies strike sublease deals with tenants or landlords head back to the open market with vacated space.
Of course, tenants see a silver lining: a respite from high rents.
“What the Westside has to understand is that $5 and $6 (per foot per month rents) don’t fly,” said Richard Ziman, chairman of AVP Advisors LLC and the former chief executive of Arden Realty Inc., an office investor and landlord.
The space
In the heart of L.A.’s office market the 75 million-square-foot area that includes Brentwood, Century City and Beverly Hills in the west and downtown in the east there are six companies (Lehman, Merrill, Countrywide, IndyMac, AIG and its subsidiaries and the defunct Bear Stearns & Co. Inc.) that account for about 1.4 million square feet. That’s roughly 1.9 percent of the market, according to CB Richard Ellis Group Inc. data.
By comparison, those six companies occupy 6.3 million square feet of the 35 million-square-foot market CB Richard Ellis roughly defines as the San Fernando Valley, which includes Calabasas and the Tri-Cities. That’s 18 percent of the market. CB Richard Ellis says much of the space is held by Countrywide and IndyMac.
“This is a big impact in the valley and a modest to lighter impact in West L.A.,” said Lew Horne, executive managing director of CB Richard Ellis’ greater Los Angeles region.
Lehman, Merrill, Bear Stearns and AIG did not return calls seeking comment and Countrywide declined to comment, but real estate industry sources provided details about the companies’ L.A. offices.
Century City, which had a relatively low 8.5 percent vacancy rate in the second quarter, is home to banking and finance companies that have offices in high-profile buildings, including the MGM Tower and the AIG SunAmerica Center.
Lehman occupies two floors in the JMB Realty Corp.-owned MGM Tower and sources say the company just signed a 10-year renewal last year. Bear Stearns has five years remaining on a lease of about 75,000 square feet at 1999 Avenue of the Stars, which is owned by Equity Office Properties Trust.
AIG SunAmerica, a subsidiary of AIG, has about 50,000 square feet in the same building. That deal expires in 2014. International Lease Finance Corp., another AIG subsidiary, occupies five floors in the MGM building.
JMB did not return calls seeking comment and Frank Campbell, managing director of the Southern California market for Equity Office, a unit of Blackstone Group LP, declined to comment because “the impact on the market is yet to be determined.”
Meanwhile, Maguire Properties Inc. is exposed downtown, where it’s the largest landlord. Merrill Lynch has a lease for about 65,000 square feet that runs through 2013 at the company’s Two California Plaza, and AIG subsidiary American Home Assurance Co. has about 100,000 square feet at Maguire’s 777 Tower. That lease runs through 2013.
“We have an awareness of it and are monitoring the situation,” said Peggy Moretti, a spokeswoman for Los Angeles-based Maguire.
Bank branches
Since the FDIC took over IndyMac, it has audited the company’s 265 leases nationwide everything from bank branches to office space to determine their usefulness.
The FDIC is using its receivership power to repudiate 98 leases for home loan office locations and regional operations centers. Another 67 leases will be taken over by Prospect Mortgage Co., which in July agreed to buy IndyMac branches. An IndyMac spokesman said that 57 leases are still needed by the bank.
Industry sources who declined to comment on the record said that some businesses have seized on the perceived need of companies to give back space and have begun inquiring about good deals on subleasing space.
“There should be great opportunities in the future,” said Eric Olofson, a vice chairman of Cushman & Wakefield Inc., who works in the firm’s Century City office. “Right now, the sentiment is that nobody wants to make any decisions with respect to their real estate needs because companies don’t have a lot of certainties with their own plans going forward.”
