Countywide Rent Discounts Fail to Attract New Tenants

Staff Reporter

L.A. County's office market loosened slightly during the second quarter, with few signs of improvement outside the San Fernando Valley and most of the activity focused on renewing leases. Lower asking rates for office leases failed to suppress a countywide rise in vacancies.

Vacancy rates for office space averaged 16.4 percent countywide, slightly higher than the 16 percent rate logged in the first quarter, according to Grubb & Ellis Co. Vacancies were just below the 16.5 percent level during the second quarter of last year.

New occupants absorbed just 72,415 more square feet than was put on the market during the quarter, far below the 876,103 square feet absorbed during the January-March period and slightly less than the 73,662 square feet absorbed in the second quarter a year earlier.

In the weak market, landlords continue to lower asking rents in order to keep current tenants and lure new ones. Average asking rents for Class-A space in Los Angeles County fell to $2.40 per square foot from $2.42 during the first quarter; they were $2.49 during the like year-earlier period.

In the Warner Center district, asking rents have fallen 20 percent in the past year to $2 a square foot, while rates along Rosecrans Avenue in El Segundo have fallen from $3 to $2.65. To retain or lure tenants, landlords have also offered other enticements, such as one month's free rent and doling out money for moving expenses.

"There are areas my clients wouldn't have seriously looked at four years ago that we are considering now. Landlords are doing anything they can to lease their space," said Steve Soloman, a senior managing director for Insignia/ESG.

Vibrant Valley

One of the few places showing any strength was the San Fernando Valley, which absorbed 469,470 square feet during the second quarter, more than any other market in the county. Much of that is attributable to aggressive leasing activity at Warner Center, including an addition of 10,000 square feet by Health Net Inc. at LNR Warner Center.

But most Valley deals were either for subleased space or renewals, such as University of Phoenix's agreement to continue leasing 33,926 square feet at Kearney Real Estate Co.'s Warner Center Business Park in May. There is plenty of discussion about new deals, but few signings.

"There's no urgency in doing transactions. It used to be hurry up. Now, it's second guess and keep looking," said John DeGrinis, a senior vice president with Colliers Seeley.

The story is much the same in downtown L.A., where tenants coughed up 350,000 square feet more onto the market than they occupied during this quarter, the worst showing of any sub-market in the county.

Downtown's statistics were dominated by a single move up Bunker Hill by Bank of America. It decamped 555 S. Flower St. for BP Plaza at 333 S. Hope, placing 262,000 square feet back on the market.

While few significant leasing deals are getting done, there has been significant buying and selling of office properties. CIM Group purchased 655 S. Hope St. from an affiliate of Shuwa Investment Corp. and Koreatown office buyer Jamison Properties bought 2024 W. 6th St. for $7.6 million.

Despite the poor climate for landlords, more office buildings will likely change hands in the third quarter. In the pipeline: Jamison's soon-to-be completed acquisition of 811 Wilshire Blvd. from the former owners of the Pacific Center, which is also being sold.

One leasing deal that may take place is City National Corp.'s expected decision to take 200,000 square feet at Arco Plaza in order to consolidate its L.A. offices.

Airport upswing?

Brokers in the El Segundo submarket, which includes the South Bay cities of Manhattan Beach and Redondo Beach, are also betting that more deals will be struck in the coming quarter. Among the firms scouring for space: Privately held defense contractor Aerospace Corp., which is looking for 25,000 to 50,000 square feet.

"There's more activity than there have been in several quarters," said Insignia/ESG Senior Managing Director Jim Jandro.

But while tenants shop around, landlords continue to suffer.

First quarter vacancy rates in El Segundo rose to 26.1 percent from 24.3 percent in the first quarter; it was 23.1 percent a year ago at this time. Tenants in the area vacated nearly 200,000 square feet more space than they leased during the quarter thanks to continued fallout from the tech bust as well as space consolidation by tenants such as defense giant Northrop Grumman Corp.

This has boosted vacancy levels in some buildings well into double-digit territory. The three-building Pacific Corporate Towers complex on North Sepulveda Boulevard has a vacancy rate of 30 percent. Another building, Continental Development Corp.'s Atrium complex at 2301 Rosecrans Ave., has a vacancy of 28 percent according to research firm CoStar Group. But considering that most of the 84,000 square feet of leased space is mostly restaurants, the actual office vacancy rate is even higher.

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