The slowing economy finally appears to be manifesting itself in the Southern California office market, as nearly every submarket of Los Angeles County experienced negative absorption in the first quarter of 2001.
According to Grubb & Ellis Co., office tenants in Los Angeles County vacated nearly 600,000 more square feet than they moved into during the quarter. The exodus marks a dramatic reversal from the previous quarter, when tenants absorbed more than 1 million square feet of office space countywide.
The only two areas reporting significant positive absorption in the first quarter were downtown and the San Gabriel Valley. With continued development of residential units and increased interest from service-oriented businesses, downtown is poised for a modest comeback, industry analysts said.
Todd Doney, an executive managing director at Insignia/ESG Inc., said downtown is in the right place at the right time.
"It's a combination of things. Downtown, of all the markets, was the least affected by dot-coms and tech firms," Doney said. "Downtown is nowhere close to adding space, and there is no significant sublease space on the market."
Nonetheless, the rate of vacancy in the city's core dropped only 1.1 percent in the quarter, falling to 20.3 percent. And that is still among the highest rates in the county, meaning it's a bit early to herald a renaissance.
"Downtown, in the great days, used to absorb 1 million feet a year," Doney said.
Countywide, the office vacancy rate rose exactly 1 percent over its level at the end of 2000. At 12.9 percent, it is down less than 1 percent from a year ago. The Westside vacancy rate continued to climb. It ended the quarter at 8.8 percent, up from 6.3 percent a year earlier.A variety of problems
The plight of the city's Westside, with the implosion of tech companies and cavernous spaces they returned to the market is well-documented. The sublease situation in Pasadena and the San Fernando Valley, however, is just beginning to emerge.
The Tri-Cities market of Burbank, Glendale and Pasadena saw its office vacancy rate edge into the double-digit territory, hitting 10.0 percent. That's up 2.4 percentage points from its year-end 2000 level. The market suffered almost 300,000 square feet of negative absorption in the quarter.
Andrew Feola, director of Cushman Realty Corp., said that, while the Westside's woes largely are attributed to the downscaling of tech and Internet companies, the Tri-Cities problems are less concentrated.
Warner Bros. retail operations, for example, left 136,000 square feet of office space at 1935 N. Buena Vista St. in Burbank, and Walt Disney Co. abandoned 34,000 square feet and 26,000 square feet at 3601 W. Olive Ave. and 4100 W. Alameda Ave., respectively.
"What this property needs is a professional landlord," Feola said of the crater left by Warner Bros. "Warner Bros. is not a professional landlord. They're an entertainment company."
The space is further complicated by its unfinished nature, Feola said. Of the 136,000 square feet that Warner Bros. is looking to sublease, a little more than half of it is not built out.
Other chunks of Tri-Cities space now available for sublease includes KABC Channel 7's space in the Grand Central Business Center in Glendale, IndyMac Bancorp Inc.'s 40,000 square feet on North Lake Avenue in Pasadena, and Idealab Inc.'s 50,000 square feet on South Lake Avenue and 25,000 square feet on Pasadena Avenue, both in Pasadena.
While there are similarities between the softening conditions on the Westside and in the Tri-Cities, Feola said the Westside is worse off. For starters, the Westside situation involves more space as much as 2 million square feet by some estimates and it was rented at record high rates (more than $4 a foot per month in some cases). Tri-Cities office rents never got above $3 per foot, Feola said.
"One of the key differences between the Tri-Cities and Westside is you're going to see the sublessor (in Tri-Cities) become more realistic more quickly," Feola said. "I think that's because there's less ground to make up. I think it's going to be a little bit of a tenants' market in Tri-Cities for the next 12 months or so."Investors cashing out
Jeff Resnick, president of First Property Realty Corp., said that Westside building owners appear to be concluding that the market for investment properties has reached its peak. At least four office building owners have approached First Property with the intention of selling some 400,000 square feet, said Resnick, who added that deals could start going into escrow by the third quarter.
"It's happening for a variety of reasons," he said. "They might have concluded, 'We've maximized and rents are healthy. Let's cash in at the right number."
And while the slowing economy may indeed prompt building owners to cash out, leading to an increase in sales activity, the volume of leasing activity is likely to slow further this quarter, industry observers said.
"What we're finding on the leasing front is companies are holding up on making commitments," said Robert Shibuya, executive managing director of Insignia/ESG.
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