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By ELIZABETH HAYES
Staff Reporter
Commercial real estate’s vital signs remained healthy in the third quarter, with any movements up or down in rents or vacancies fairly modest in most areas of Los Angeles.
Countywide, office tenants moved into more space than they vacated in the third quarter, by 919,279 square feet. This brought down the overall vacancy rate to 14.9 percent, from 15.5 percent in the second quarter, according to Cushman & Wakefield Inc.
But several industry observers noted that hesitancy has been rising among tenants, reflective of the uncertainty in the overall economy. The clouds looming beyond the solid third-quarter performance include the Asian and Russian financial crises and turmoil in the capital markets, which have thrown a wrench into numerous L.A. real estate deals.
Locally based real estate investment trusts, whose share prices remain depressed, have also scaled back their acquisition activity.
“Tenants are taking a good hard look at any lease commitment in today’s market,” said Brad Cox, senior managing director of the Pacific Southwest region for Cushman & Wakefield. “We have not seen a complete pullback or seen people changing their minds. They’re just being more prudent.”
How that caution translated into the real estate numbers if at all during the third quarter varied by area.
The Westside and South Bay markets saw office vacancies continue to ratchet down by more than a percentage point, at 11.2 percent and 16 percent respectively. The Tri-Cities, however, softened in the third quarter to 14.5 percent vs. 13 percent a quarter earlier.
The San Fernando Valley office market held steady, with a vacancy rate of 13.4 percent in the third quarter. Downtown and Mid-Wilshire likewise treaded water, but with considerably higher vacancy rates of 17.7 percent and 27.7 percent, respectively.
No market made dramatic gains or experienced stunning losses in the quarter, except for the Santa Clarita Valley, which saw its office vacancy rate rise to 34.1 percent from 11.8 percent. That jump resulted from the newly renovated, 240,000-square-foot Tourney Pointe in Valencia coming back onto the market.
By far the hottest submarkets during the quarter were on the Westside, where tenants moved into 419,179 more square feet than they vacated. The Westside, as a whole, tightened to 10.3 percent vacancy from 11.4 percent in the second quarter. Westside rents rose accordingly, to $2.62 per square foot per month, up from $2.05 in the second quarter.
“People continue to gobble up space,” said Stanley Gerlach, a senior vice president at CB Richard Ellis. “There’s still a lot of major tenants in the marketplace poking around. Most of it is musical chairs, with some growth.”
Tim Macker, president of Westmac Commercial Brokerage Co., said his firm didn’t experience any slowing of transaction volume but there is concern.
“The only real difference we observed is, in conversations with businesspeople, they’re more hesitant and there’s growing concern as to what may happen down the line,” Macker said. “Everyone is looking cautiously at the potential for a slowdown.”
Nasdaq-listed companies on the Westside have gone from being flush a few months ago to dealing with falling share prices, he said.
Considerably less robust has been Westside office sales activity, which totaled 2.1 million square feet through the first three quarters of 1998, off 50 percent from the like year-ago period. Cushman & Wakefield attributed the slowdown to the fact that many once-distressed office buildings were sold prior to this year, and prices have surpassed replacement costs.
Office development on the Westside, meanwhile, hummed along, with 923,215 square feet under construction. While it hasn’t broken ground yet, the 3 million-square-foot Playa Vista project got back on track during the third quarter, with DreamWorks SKG having agreed in principle to develop its new studio there.
Two of the hottest South Bay submarkets during the quarter were El Segundo-Manhattan Beach and the Long Beach Airport area.
“El Segundo seems to have a lot going for it it’s near the Westside,” said David Prior, president of the Klabin Co. “There are very few choices above the 10,000-square-foot range in the Long Beach Airport area. It’s a good place to be for access.”
As for the industrial market, L.A.’s north county market had the lowest overall vacancy rate in area. But how long will it last?
“I don’t see demand for office and industrial maintaining the pace of the last 18 months,” said Ron Feder, managing principal at Lee & Associates. “I do anticipate a hiccup or stall in the future.”
Feder said demand for space is not that strong with small companies in particular.
“I have concern for them being able to continue to justify growth levels in light of what’s going on in Asia and what’s happening in the financing market. It may be we’re experiencing the beginning stages of a stalling market,” he said.
