Recession Grips Market as Firms Cut Expansion Plans

Staff Reporter

Remove one submarket from Los Angeles County and you're left with an office market that managed to tread water during the fourth quarter.

Plug back that submarket the Westside and you have a quarter that provided little relief to rising vacancies and declining rents.

"Relatively speaking, Los Angeles has fared very well compared to other markets," said Jeff Scheferman, president of Colliers-Seeley International Co. "But without question, we're in a recession."

Countywide, office vacancy rates hit 15.1 percent in the fourth quarter, up from 14 percent in the previous three months and 12.2 percent in the fourth quarter of 2000, according to Grubb & Ellis Co. The average asking rent for Class-A space in the fourth quarter was $2.26 a foot, unchanged from the third quarter, but down 22 cents from the year-earlier period.

The rise in vacancy rates reflected a post-attack economy that saw conservative firms cut back on space and force even the most ambitious firms to reconsider expansion plans.

"We're all still reacting to (Sept. 11)," said Jerry Katell, president of Los Angeles-based developer Katell Properties LCC. "What we've seen is, with regard to expansion and relocations, a lot of caution on the part of businesses."

With 4.5 million square feet under construction countywide and no industry appearing as a clear source of growth, vacancy rates are expected to keep rising well into the year.

"There will not be a significant near term rebound for demand in office space," said Stuart Gabriel, director at USC Lusk Center for Real Estate. "It's difficult to suggest where there will be strengthening in the market."

Westside remains a drag

This downturn has most affected the Westside, which in turn has had a disproportionate drag on the rest of the market.

According to Grubb & Ellis, the 47 million square foot Westside office base accounts for 28 percent of the county's total. But with 820,000 more square feet coming back into play than were leased up, the submarket managed to sink the county as a whole, which otherwise had been flat in the fourth quarter. L.A. County posted negative net absorption of 831,000 square feet.

Westside vacancy rates jumped to 13.6 percent in the fourth quarter, from 11.6 percent in the third. Yet even with the weakening market, the Westside holds onto the highest average asking rents $3.07 per foot per month of all the county's submarkets.

The downturn was spread evenly, as Santa Monica, Century City and the Marina/Culver City areas saw negative net absorption of 288,000, 175,000 and 219,000 square feet, respectively. The only Westside market to absorb space was the relatively cheap (at $2.31 a foot) Miracle/Park Mile district.

The Westside woes should not come as a surprise the market that lived by the dot-com is now suffering by the dot-com. "The dot-com implosion clearly accounts for the swing," Scheferman said. "That just about eliminates the growth we had in 2000."

More surprising was the softening in the San Fernando Valley, which saw a 2 percent jump in vacancy rates between the third and fourth quarters, topping out at 15.5 percent.

Leading the way was the West Valley, whose vacancy rate in 2000 dropped into the single digits as a result of biotech firms along the 101 corridor. But in the fourth quarter, the West Valley posted negative net absorption of 162,000 square feet two thirds of the total posted throughout the San Fernando Valley. That helped push vacancies to 17 percent, up from 13.9 percent in the third quarter and 9.6 percent during the fourth quarter of 2000.

"They're really experiencing upward movement in vacancies," said Gabriel. "The fundamentals are very strong in the long run, but we've got to get to the long run."

Two notable firms that returned space to the market were NetZero in Westlake Village, which merged last year with Juno to become United Online, and Walt Disney Co., which reduced space in North Hollywood.

Pocket of optimism

The lone bright spot in the county was the San Gabriel Valley, where relatively inexpensive rents and a limited supply of office space helped drive vacancies lower.

"We've had our fourth record absorption year in a row (and) we have very little land left to grow," said Trammel Crow Co. Senior Vice President Ron Heim.

The result has been over a 2 percent drop in vacancy, to 12.4 percent in the fourth quarter. And while Class-A rental rates have risen slightly over the same period a year ago, space still can be had in the San Gabriel Valley for 50 cents a foot less than the nearby Tri-Cities.

The hesitancy of firms to pull the trigger on deals for office space in the fourth quarter was mirrored in the county's industrial market, as sales and leasing activity was down 35 percent from the fourth quarter of 2000.

As a result, only half of the 3.2 million square feet of industrial space that came on line in the third quarter was absorbed. That bumped vacancies to 4.4 percent, from 4.2 percent in the third quarter and from 3.6 percent for the year-earlier period.

Reflective of the price sensitivity was the most expensive industrial submarket North Los Angeles, at 59 cents a foot that saw the greatest jump in vacancy. Relatively inexpensive markets like Mid-Cities and the San Gabriel Valley benefited, as both markets tightened in the fourth quarter.

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