Lower Rent Rates Fail to Spur Reversal of Vacancy Increases

Contributing Reporter

Lowered asking rents did nothing to tighten up the still-ailing Westside real estate market in the second quarter.

While smaller pockets of the market showed improvement, the overall vacancy rate jumped by 1.5 percent, to 17 percent, over the first quarter. At the same time, average Class-A asking rents dropped 7 cents, to $2.77.

Lower rental rates, it seems, are not enough to spawn business expansions.

"There's no real new demand for space in the Westside market, and there hasn't been for several quarters," said David Toomey, a principal with CRESA Partners. "I don't expect demand to pick up for several more quarters because space is a function of hiring, and we don't see that happening for a while. And even if it does pick up, there's still a fair bit of excess capacity on the Westside."

With little activity to take the 8.6 million vacant square feet off the market the Westside saw 6,000 square feet put back on the market last month after having more than a quarter million taken off in the pervious period landlords have increased their attention to retaining existing tenants.

"The Westside markets are simply exchanging vacancy rates," said Mark Robinson, corporate managing director for Julien J. Studley Inc. "You'll see someone leaving 100,000 square feet in El Segundo taking the same space in Santa Monica. It's not going to do anything for absorption."

Century City accounted for the biggest portion of the drop in net absorption, moving to negative 154,033 square feet in the second quarter from negative 10,068 square feet in the first. The bulk of the shift was due to the MGM Tower, which came on line in the second quarter. Although it is 75 percent leased not bad for a just-delivered building it nevertheless has added 200,000 vacant square feet to the Century City market.

That helped spike Century City's vacancy rate to 20.3 percent, up from 11.8 percent in the first quarter. At the same time, Class-A asking rents dipped by 7 cents per foot, to $3.15 over the same period.

Aside from MGM, activity in Century City came from professional services. Three law firms took a significant portion of space at 1875 and 1925 Century Park East. Epport & Richman took 10,010 square feet in a 10-year lease; Huron Law Group leased 9,532 square feet over seven years; and Charlston Revich & Chamberlin inked a five-year deal for 12,099 square feet.

In Santa Monica, where vacancy rates held steady at 15 percent and net absorption slipped to negative 12,000 square feet, rents tumbled to $3.16 per foot pert month in the second quarter from $3.34 in the first, precipitated largely by a 30 cent drop in asking rents at Colorado Center, the former MGM Plaza, and other smaller drops elsewhere, brokers said.

At the Santa Monica Business Park, 2850 Ocean Park Blvd., asking rates are about $2.35 and strike rates lower still. Provident Financial Management paid $2.24 per for 34,000 square feet over 84 months.

Other major deals in Santa Monica included American Golf Corp.'s renewal of a 35,000 square foot lease at 2951 28th St. for $12 million over 10 years and the Volkswagen of America Inc. sublease of the 53,000-square-foot building that previously housed the Museum of Flying for $17.7 million over 13 years.

The biggest swing was in West Los Angeles, where nearly 90,000 more square feet came off the market than came on. Fueling the activity were a handful of deals totaling 29,000 square feet at the Westwood Gateway, 11500 Santa Monica Blvd., including International Medical Corp.'s lease of 9,769 square feet for $1.3 million for five years. The Arden Realty Corp. building is about 94 percent leased.

West L.A. vacancy levels fell accordingly, to 13.8 percent from 15.2 in the first quarter of 2003. Rents slipped slightly, to $2.33 in the second quarter from $2.37 in the first.

Much of the activity came in investment deals, which were plentiful through the second quarter. David Lee's Jamison Properties, which owns two dozen buildings in Wilshire Center, purchased the 206,000-square-foot building at 11620 Wilshire Blvd. from Lowe Enterprises for $43 million.

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