Softening Continues, Hit by Entertainment Consolidation

Contributing Reporter

Things aren't exactly grim, but the Westside office market is far from robust these days.

Many multi-media companies have become ghosts from Culver City to Santa Monica, leaving lots of attractive sublease space. As a result, Westside office rents declined and available space rose for the third consecutive quarter, according to Grubb & Ellis Co.

Vacancy rates in the first quarter of 2002 increased to 15.1 percent from 13.6 percent three months ago, well above the 8.8 percent rate posted in the first quarter of last year. At the same time, the average asking rent fell to $2.93 a square foot from $3.07 in the fourth quarter of 2001 and $3.21 a year ago.

"Succinctly, we are in a softening market," said Craig Meyer, senior vice president at Colliers Seeley International. "Only opportunists are looking for space."

The Westside depends upon the entertainment industry to drive other businesses, and the real estate market is no exception. With companies closing or trimming divisions, there is plenty of available space.

Nowhere was this more apparent than in Westwood, which saw its vacancy rate jump to 21.4 percent from 13.8 percent, even as rates rose negligibly to $3.47 per square foot from $3.45. Saban Entertainment, which last year sold its Fox Family channel to Walt Disney Co. (which re-named it ABC Family) has put as much as 200,000 square feet of office space on the market at its headquarters at 10960 Wilshire Blvd.

Other parts of the area showed continued signs of weakness as well. The West L.A. office market vacancy rate rose to 16.8 percent from 15.3 percent last quarter, while Century City reached 10.7 percent from 7.6 percent.

Sublease activity

Sublease rates remain much lower than the official rates, and that is where much of the action is taking place. The most prominent example was news that law firm Alschuler Grossman Stein & Kahan would move from the Century Plaza Towers in Century City to the Water Garden I office complex in Santa Monica. The 10-year sublease deal for 85,000 square feet of office space with Turner Broadcasting System reportedly is worth more than $30 million.

"This sub-lease market is, in many respects, the driving force of the office space market overall," said Neil Resnick, senior vice-president at Grubb & Ellis.

While Meyer sees possible improvement by the fourth quarter, others were less upbeat. "Pricing still has not come down to reflect the softening in the market," said Gerald Porter, vice-chairman of Cresa Partners. "There are so many institutional landlords, they are hard pressed to lower rates because it has an impact on their portfolios."

Unfortunately, there is little on the horizon that would alleviate their concerns. Porter and others say that while there have been some signs of general economic recovery, things remain tenuous at best. Companies are either laying people off or holding steady, few are hiring. Spending is being watched very closely, so there aren't a lot of capital expenditures being made. Recent corporate scandals mean balance sheets are being closely scrutinized, hardly a time to go out and shop for Westside office space and the entertainment industry isn't priming the pump.

"The migration of the entertainment industry to the Westside, so that executives could be close to home, has largely run its course," Porter said. "The problem is that there's still more retrenchment to be done by some of the movie studios in their smaller divisions. And everybody feeds off that."

But even amid this gloom, no one appears to be panicking. Because the run-up in Westside office rates was so spectacular in the late 1990's, the subsequent fall has left prices with some room to move downward without pushing landlords into the red.

"Landlords are in a difficult position because they're being squeezed with added costs, especially in higher (post 9-11) security costs and energy costs," Porter said. "But look back to the mid-90s and consider then when many of these new buildings were being built, they had stopped expecting $2.25 to $2.50 a square foot and those were forward-looking rates. Prices went up to $3 a foot and $4 and even more. That's all gone away. But I think anybody out there is still healthy at $2.50 a square foot."

So even if things don't get better for a time, there's still room to maneuver. "My gut feeling is that we're going to experience an increase (in vacancy rates)," Resnick said. "If I see any relief, maybe there'll be a higher absorption rate in the fourth quarter. But I don't know.'

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