Dozens of dot-coms have hit the skids, but you might never know it by looking at leasing on the Westside, where a continuing flood of tenants with deep pockets has kept it the hottest office market in L.A. County.
Despite some slight upticks in vacancy rates as new buildings came on the market, space is still scarce, demand is still high, and landlords are still collecting rents that in some key areas saw dramatic increases.
In Santa Monica, the vacancy rate climbed from a miniscule 1.7 percent in the second quarter to 3.6 percent in the third quarter. In Culver City, the rate went from 3.3 percent in the second quarter to 5 percent in the most recent period, according to Grubb & Ellis Co.
"Those percentage changes are not particularly significant," said Andy Fishburn, senior vice president of leasing and marketing at Kilroy Realty Corp. "The Westside is a fireball."
Fishburn attributed the vacancy increases to new space officially added to the marketplace at the Water Garden and Howard Hughes Center.
On another front, brokers saw some major jumps in average asking rates, which rose to $3.59 per square foot per month in Santa Monica in the third quarter, up 16 cents from the second quarter. In Century City, the monthly asking rate went up to $3.02 a foot in the third quarter, from $2.69 in the second period.
At 1999 Avenue of the Stars in Century City, the landlord is getting $4.50 per square foot. The $5 barrier has already been broken in several Westwood projects, such as the Westwood Gateway.
"It's unprecedented," said DLJ Realty managing director J.D. Cook. "The new heights on rental rates haven't leveled off, but instead continue to increase."
Cook doesn't anticipate a slowdown anytime soon. In fact, he predicts that some Westside tenants will shell out up to $7 per square foot next year for the most desirable real estate.
To get into the market, tenants are accepting annual increases as part of their lease agreements. In Santa Monica, for example, annual increases of 5 percent are being negotiated in some deals.
Cook said the increases are inevitable because of the exorbitant prices being paid for some buildings in recent sales transactions. As an example, he cited Donald Bren's second-quarter purchase of Fox Plaza from Marvin Davis for $500 per square foot, which amounted to some $300 million.
It seems the market has been immune to the much publicized dot-com failures, many of which involved Westside companies.
"Although we are seeing some dot-com companies giving back space, it has not put any type of damper on the market," said Robert Petticord, senior vice president at Arden Realty Inc. "That space is being back-filled quickly. Whether it's another New Economy tenant or an Old Economy tenant, there's always somebody there."
In fact, Westside landlords are some of the few beneficiaries of dot-com burnout. Brokers say some landlords will gladly rip up a lease with a downsized or dead dot-com in exchange for a lump-sum payment. The vacated space can usually be leased, at a higher rate, in less than a month to a new tenant.
During the third quarter, vacant space was quickly gobbled up in the second phase of the Water Garden, which cost tenants north of $4 per square foot per month.
Another market to watch within the Westside is the so-called "lower Westside" in the Culver City area. The "if-we-build-it-the-coastal-crowd-will-come" approach seems to be paying off at the Howard Hughes Center in Culver City. Arden's newest building at 6080 Center Drive is already 80 percent pre-leased and is scheduled to open in spring. Pre-leasing rates at 6080 Center Drive are going for an average of $3.40 per square foot per month.
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