Real Estate Quarterly — Westside Overflow Keeps Fueling Tight Office Market

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Office and industrial space in the South Bay is getting steadily scarcer as the Westside fills up and companies turn south in search of new digs.

Overall, the office vacancy rate declined to 12.6 percent in the second quarter, down from 15.3 percent in the first quarter, according to Grubb & Ellis Co.

The industrial vacancy rate also dipped slightly, to 3.77 percent, from 4.0 percent in the first quarter which means rentable industrial space is almost nonexistent.

“The overflow from the Westside is much like a tube of toothpaste being squeezed into the South Bay,” said William S. Goodglick, president of the Goodglick Co. brokerage. “It is moving southward and following the spine of the 405 (San Diego) Freeway.”

As an example of how quickly property is moving, Goodglick pointed out that his company two weeks ago listed a 61,000-square-foot office building at the corner of Aviation and El Segundo boulevards. Goodglick expects to have the building fully leased in three months. In slower times, the building would have taken six months to lease. “We’re seeing a lot of dynamism in the market,” Goodglick said.

For example, Digital Media Campus recently signed an eight-year, $12 million lease for 55,000 square feet at 2221 Park Place in El Segundo. The company is an incubator for sports- and entertainment-industry startups. Digital Media’s investors include Los Angeles Lakers star Shaquille O’Neal, sports agent Leonard Armato and Oracle Corp. Chief Executive Larry Ellison.

Currently, the office vacancy rate in the El Segundo/Manhattan Beach submarket is 9.3 percent, down from 12 percent in the first quarter. With fewer vacancies, more office buildings are being constructed, particularly in El Segundo and along the 190th Street Corridor, said Kevin A. Shannon, a senior vice president at Grubb & Ellis.

Continental Development, one of the largest landlords in El Segundo with a 90-acre office complex, is constructing a 25,000-square-foot office building called Aviation Center at Rosecrans Avenue and Aviation Boulevard. It is slated to be up for lease early next year.

Even the perennially high office vacancy rate around Los Angeles International Airport is dropping. During the second quarter it hovered around 26 percent, down from 28.6 percent the previous quarter.

The LAX office market is made up of several buildings on Century and Sepulveda boulevards. They were built primarily in the 1970s and 1980s to serve the aerospace industry, which has waned in the last decade. Now these offices are in greater demand as rents climb in nearby areas.

While office rents in Santa Monica are as high as $3.43 a square foot, comparable space goes for only $1.51 a foot around the airport.

As space gets scarcer in the South Bay, companies are beginning to recycle their land. An example of the trend is Boeing Co.’s project. It is taking a former McDonnell Douglas plant in Long Beach and demolishing more than 100 buildings to erect a new office and industrial park on the site.

The project is ambitious. Boeing plans to take 230 acres of the 370 acres formerly devoted to aircraft construction in Long Beach and convert it into 5 million square feet of office space.

“Reuse is the direction Los Angeles is going. We’re running out of space, especially in the South Bay where industrial vacancies are down,” said Stephen Craig, information manager in the research department at CB Richard Ellis. “We’re going to see more and more of this.”

The Boeing project, called PacifiCenter@Long Beach, is targeting high-tech industry tenants, who need the electrical power, fiber optics and telecommunications services Boeing already has in the area.

“We have a surplus of property and it’s necessary to transition it,” said Philip W. Cyburt, president of Boeing Realty Corp., which is master developer of the property.

The first buildings probably won’t be completed for another four years, while Boeing develops a master plan and does an environmental impact report.

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