Despite financial earthquakes in the dot-com world, the Westside office market sustained its hot steak through the second quarter. High demand continued to push rents up and vacancy rates down during the period.
The office vacancy rate dropped from 5.5 percent in the first quarter to 5.1 percent in the second. Meanwhile, the market's average monthly asking rent rose slightly in the second quarter to $2.77 per square foot, from $2.76 in the first quarter, according to Grubb & Ellis Co.
Robert Peddicord, senior vice president at Arden Realty Inc., said he has never seen a market like this.
"The questions are, how low will the vacancy (rate) get and how high will rents get," Peddicord said. "There's nowhere to go."
Brokers said the growing failure rate among dot-coms has not impacted the market, partly because every space vacated by a shuttered dot-com is being sought by multiple new businesses, including other Internet startups.
"It's probably the most attractive space to the startups, because you've got the space that's pre-wired," said Jeffrey Strnad, a senior vice president of DLJ Realty Services Inc.
The market quickly swallowed up 166,428 square feet of office space that came on the market in the second quarter, and industry observers expect the trend to continue, even with 1.5 million square feet of space under construction.
In the priciest Westside buildings, monthly rents are approaching $5 per square foot and not just in new projects, said Bob Safai, a principal at Madison Partners. That has encouraged landlords to increase rents throughout the area.
"We've continued to push the envelope on rents, and hence all the boats are rising," Safai said.
The increase in lease rates has been accompanied by higher selling prices, though there were no purchases that topped the $360 million, first-quarter acquisition of MGM Plaza in Santa Monica by Tishman Speyer Properties from MaguirePartners.
Second-quarter sales included the $45 million purchase of a 260,000-square-foot building at 11600-11620 Wilshire Blvd. by Lowe Enterprises, and the $20 million purchase of 808 Wilshire Blvd., a 75,000-square-foot building, by Fujita Corp.
In Santa Monica, the second phase of the Water Garden saw a slew of leasing activity. The project is now 80 percent preleased, thanks in part to deals that have gobbled up 315,000 square feet since the start of April at as much as $4.25 per square foot per month, according to Scott Chalmers, a senior vice president of J.H. Snyder Co.
"We've had tremendous activity this second quarter," Chalmers said.
The largest new tenant is Internet consulting firm Sapient Corp., which leased three floors totaling 81,000 square feet as part of an 11-year deal. Other activity involved Sony Music Entertainment, which signed a 10-year lease for 53,000 square feet. Xdrive Inc. entered a seven-year lease for 50,000 square feet, while Quantum Digital Solutions Inc. signed a lease for 11,000 square feet.
Meanwhile, Sutro & Co. Inc. signed a 10-year lease for 19,000 square feet, and Getty Images inked a 10-year lease for 25,000 square feet.
The deals may keep coming hot and heavy on the Westside, where another 1.5 million square feet of office space is under construction, according to Grubb & Ellis. Brokers believe the market will have little trouble absorbing the space.
"I think people are going to be surprised," Peddicord said. "I think it's going to fill up quicker (than space has been leasing)."
At the Howard Hughes Center off the San Diego (405) Freeway, landlord Arden Realty is in negotiations that could fill space on all 12 floors at 6080 Center Drive a 300,000-square-foot building that's still seven months from completion, said Michael Pollack, Arden's director of leasing for the center.
Entertainment, financial services and software companies are leading the way.
"These aren't dot-coms at 6080," Peddicord said. "These are more traditional agencies."
Strnad thinks the market may eventually slow from its torrid pace, but the pent-up demand will certainly be able to absorb large amounts of new construction for some time to come.
"You might sit back and say that's a lot of space to absorb," Strnad said. "But look at it relative to the size of the market and the leasing rate we have."
The fact that dot-coms are becoming more careful about watching the bottom line is making those firms increasingly open to the possibility of occupying smaller buildings, and that has Strnad looking for space for clients as far afield as the east end of the Miracle Mile district and in Culver City.
The crunch for Westside office space also has more tenants turning to the LAX corridor as a cheaper alternative to skyrocketing rents.
"Space is leasing up on Century Boulevard," Peddicord said. "It's always the way it's been. It's the last market that people look to, but I think people now are more focused on it because it's more economical."
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- WESTSIDE---Dot-Com Doldrums Don't Slow the Red-Hot Market
- WESTSIDE - Feeding Frenzy' Making Space Very Tough to Find
- INTERNET---Dot-Com Sublet Space Floods Westside Market
- WILSHIRE---Struggling Tech Firms Turn To Area to Save on Leases
- WESTSIDE---Rents Dive As Huge Supply Of Space Comes on Market
- Santa Monica Paces Submarket As Dot-Com Recovery Persists
- Real Estate Quarterly --- Dot-Com Pullback, Nasdaq Decline Slow Momentum
- Real Estate--South L.A. Site Eyed as Retail, Multimedia Complex