Staff Reporter

The commercial real estate market's upswing showed no signs of letting up in the second quarter, as vacancies inched further down in most markets, rents climbed, and development activity accelerated.

Office tenants in Los Angeles County moved into 695,000 more square feet of space than they vacated in the second quarter, bringing the overall vacancy rate to 15.5 percent. That's down from 16 percent in the first quarter.

The Westside and Tri-Cities remain the most sought-after local markets.

"We couldn't be busier. Normally, we would expect a seasonal slowdown," said Tim Macker, president of Westmac Commercial Brokerage Co. "We're seeing strong momentum. On the Westside, it's so tight both for (property) available to lease and to purchase."

Westside office tenants moved into 44,717 more square feet of space than they vacated during the second quarter, yet the office vacancy rate inched up to 13.3 percent from 12.3 percent in the first quarter. That slight increase was due to new buildings coming onto the market, however, not market weakness. Excluding Hollywood, Miracle Mile and Park Mile, the Westside vacancy rate was only 11.4 percent.

Cushman & Wakefield reported that the Tri-Cities is even tighter than the overall Westside, at 13 percent, down from 13.9 percent in the first quarter.

Those markets, understandably, are also the most expensive. The Westside's average monthly asking rent is $2.05 a square foot, and Tri-Cities' rent is $1.93 a foot. That compares with a countywide average of $1.69.

Rents reached upwards of $3 for some top-tier space in Santa Monica, a preferred location for many entertainment firms.

"It's got a good location and good quality of life," said Bob Safai, owner of brokerage firm Madison Partners.

While sticker shock is rare, those seeking space are often in for a rude awakening at the lack of choices, Macker said. Contiguous blocks of class-A space greater than 50,000 square feet have dwindled throughout the Westside.

"They automatically think if they come to Santa Monica, there would be space waiting for them, but a number of buildings are 98 to 100 percent leased," he said.

The only Westside weak spots are fringe buildings along Westwood Boulevard, where vacancies are higher, he said. Indeed, Westwood was the weakest performing Westside submarket in the second quarter, with tenants vacating 67,896 more square feet than they occupied.

While the Westside and Tri-Cities hummed in the second quarter, other areas lagged. Most notably, downtown, the LAX area, Mid-Wilshire and Long Beach all remain soft. Mid-Wilshire's vacancy rate improved slightly, to 27.6 percent in the second quarter from 28 percent during the previous three months, but its average monthly lease rate of $1.15 is the lowest in the entire county, even lower than LAX-area rents.

The area suffering the biggest setback was the Long Beach Freeway Corridor submarket, which saw its vacancy rate jump to 21.3 percent, up from 13.7 percent in the first quarter. Tenants there bailed out of 132,855 more square feet than they occupied.

Other South Bay submarkets more than made up for that loss, however, bringing the South Bay's overall vacancy rate down to 17.3 percent, a 1.2 percentage point improvement from the first quarter. That strength was primarily from the El Segundo/Manhattan Beach and 190th Street Corridor submarkets.

The San Fernando Valley market, which includes the Conejo and Santa Clarita valleys, improved its vacancy rate slightly, to 13.4 percent, down from 13.8 percent in the first quarter. In Warner Center, direct vacancies dipped under 11 percent.

Still looming is the potential fallout from the Asian financial crisis. But so far this year, the market's vital signs appear healthy, with little prospect for a reversal any time soon, brokers said.

Strong job growth, the lowest unemployment level in 25 years and a diverse economic base have all benefited the market. The proof can be seen in the wave of development sweeping the county, in every property category. The activity includes doubling the capacity of the ports, the new Staples Center sports arena downtown and almost 8 million square feet of industrial space under construction, much of it speculative.

Speculative office development also cranked up in the second quarter, with 923,215 square feet currently under construction on the Westside and 898,000 square feet in the Tri-Cities. And that's not counting the 3 million-square-foot Playa Vista project, which remains in limbo.

"It's getting to the point in L.A. that there aren't many vacant properties available, so you have to look at taking existing buildings and rehabbing them," said Gary Toeller, senior vice president at Koll Real Estate Group. "We have decided to look for infill locations of buildings that are not desirable and make them desirable."

But Koll is not limiting itself to rehabs. It is planning a new spec office tower and low-rise project in Culver City and a couple of spec office projects in Pasadena, as well as rehabbing a four-story building in Century City.

"If we can produce built space, we're confident we can get a major tenant at the construction stage," said Toeller.

The Westside construction activity is concentrated in Santa Monica, where three projects are underway: Lowe Enterprises' Arboretum Courtyard, Apollo Pacifica's Arboretum Gateway and the second phase of J.H. Snyder Co.'s Water Garden.

Real estate brokers said the current level of demand should be sufficient to absorb the new office space with little problem. Macker said projects such as Arden Realty Inc.'s Howard Hughes Center will be "a valve to give us some relief and stem the tide of rents."

"It's hard to overbuild since it's almost impossible to get entitlements on real estate here," he said.

In Burbank, M. David Paul Development is at work on a 215,000-square-foot office project, while J.H. Snyder, Kilroy Realty Corp. and Regent Properties each have plans for low- to mid-rise office projects in the Media District or downtown Burbank.

Next door in Glendale, construction is well underway on PacTen Partners' 520,000-square-foot Glendale Plaza and the Howard Platz Group expects to complete its nine-story office building at 400 N. Brand in January.

Still, some have noted a slowing in the Tri-Cities market.

"There's demand, but a lull in demand," observed Larry Rappoport, a principal at Lee & Associates. "You had a lot of companies that gobbled up space in the past and maybe they overextended and they're downsizing or right-sizing. Space is slowly being absorbed."

Leasing agents still have not signed up tenants for the two major office buildings under construction in Glendale and Burbank, and the long-awaited groundbreaking for Snyder's office project in Burbank's Media District didn't happen in the second quarter.

"The priorities of the tenant population are with value and affordability," said Bill Boyd, a senior vice president at Grubb & Ellis Co. "The market can absorb the most affordable projects."

Boyd predicts that by the end of the third quarter, vacancies will be "well into the single digits" and by year end there will be very little contiguous space available.

A late bloomer to L.A.'s rebound is downtown. Its 17.6 percent vacancy rate is still well above the countywide rate of 15.5 percent, but it is ratcheting down, with 130,887 square feet being absorbed by tenants in the second quarter, according to Cushman & Wakefield.

"It's dropping significantly in the tier-one properties," said Hayden Eaves IV, a broker at Cushman & Wakefield. "It's a sign that employers can't get by with working a few people more hours. Most people who took space in the early '90s were downsizing or shrinking. Now the normal progression of hiring is running them out of space. They don't have anybody left to spread thinner."

Driving forces include the internal expansion of existing tenants, the telecommunications boom, insurance firms that have relocated to downtown from Mid-Wilshire and outlying areas and growth in the government and financial sectors. Eaves said a couple of law firms that subleased unneeded space now need it back.

The accounting world consolidations haven't hurt either: In the second quarter, Deloitte & Touche LLP selected Two California Plaza to consolidate its local operations offices, while KPMG Peat Marwick LLP leased 125,000 square feet at Wells Fargo Center. Still, it remains to be seen how bank mergers announced this spring will affect downtown.

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