Cautious Tenants Keep Office Leasing Action Sluggish
By DANNY KING
Staff Reporter
Office leasing in L.A. County showed few signs of turning upward last quarter, although the industrial side held up amid a continuing dearth of space.
Office vacancies rose to 16.7 percent for the fourth quarter from 16.5 percent in the third quarter, reflecting a market where renters are still hesitant to take more space.
More than 26,000 square feet was put back on the market during the last three months of the year, up from the 836,000 square feet that went dark during the year earlier period but a fall-off from the nearly 320,000 square feet absorbed during the third quarter.
For all of 2002, there was 319,000 square feet of negative absorption, boosting vacancies from 15 percent at the end of 2001.
“Everyone’s looking for the next dot-com to pull us out and there isn’t going to be one,” said Chris DuMont, senior vice president at Grubb & Ellis Co. “We’re going to have a very flat 2003.”
Blockbuster deals like the long-term leases by Unilab Corp. in the West Valley and Clear Channel Communications Inc. in Burbank for more than $60 million and $45 million, respectively, were exceptions. Most activity was limited to renewals and short-term deals.
“The market hates uncertainty and we have that in spades,” said Stephen Cauley, associate director at the Ziman Center for Real Estate at UCLA’s Anderson School. “In terms of major growth, I don’t see it.”
Rents fell to $2.53 by the end of the year from $2.53 at the beginning of 2002.
The hardest hit submarket was downtown, where vacancy rates jumped to 19.6 percent from 18.5 percent for the third quarter. Nearly 172,000 square feet of downtown space was put back on the market, the most among L.A. submarkets.
The largest deal of the quarter, law firm Quinn Emanuel Urquhart Oliver & Hedges LLP’s $30 million expansion to 121,000 square feet at the TCW Building, was more than offset by Lyon & Lyon’s dissolution at Library Tower and Latham & Watkins’ lease expiration at Arco Plaza. Both developments put a combined 200,000 square feet back on the market.
Another 160,000 square feet at Library Tower will be available once Arthur Andersen’s bankruptcy proceedings are complete.
“Firms are trying to make do with what they have until they’re forced to make a decision but at the same time, you have leases that are expiring and tenants with excess space that might renew but downsize in the process,” said Todd Anderson, senior director at Cushman & Wakefield Inc.
West L.A., which has been hard hit by the tech wreck, showed considerable strength. Despite a still-high vacancy rate of 15.8 percent, two points higher than a year ago, asking rents are at $2.86 a foot, down 21 cents from a year ago. The market had its third straight quarter of positive absorption, as about 50,000 square feet was taken off the market.
“The smart landlords are trying to cut rates,” said DuMont. “Landlords who wouldn’t talk about short-term holdovers 24 months ago are happy to have them.”
While more than a million square feet of office space under-construction hangs over the market, three-quarters of the 710,000-square-foot Constellation Place in Century City, which is scheduled for completion in May, has been pre-leased.
Meanwhile, nearly 128,000 square feet was absorbed in the South Bay during the fourth quarter, though vacancy rates remained high at 19 percent. The most prominent deal was Molina Healthcare Inc.’s 66,000-square-foot lease at downtown Long Beach’s Arco Center for $17 million, but “it’s a bunch of smaller deals” driving activity in the El Segundo and LAX/Century Boulevard markets, according to Jim Biondi, senior vice president at Grubb & Ellis.
Still, the positive movement will be short-lived, according to Biondi and Grafton Tanquary, senior vice president at CB Richard Ellis. “It’s an aberration,” said Tanquary. “We’re continuing to see contraction in major users like DirecTV and United Airlines.”
Things look better on the industrial side, which is considered a far safer investment because space is at a premium in L.A. County.
The countywide industrial vacancy rate for the fourth quarter was 3.9 percent, down from 4.1 percent in the previous three months. The 12.2 million square feet of sale and leasing activity, while down slightly from the third quarter, was 38 percent more than the 8.8 million square feet sold and leased during the fourth quarter of 2001.
Meanwhile, low interest rates are pushing more end-users like cold storage or produce companies into the buying market from the leasing market, said Bart Pucci, senior vice president at CB Richard Ellis. “The market is driven so much by people that want to buy that there hasn’t been anything left over to lease,” he said.
