Impact of Few Large Deals Buoys Otherwise Quiet Period

By DANNY KING
Staff Reporter

After three consecutive quarters where more space has been leased than put back onto the market, L.A. County's overall office vacancy rate is at its lowest point in nearly two years.

However, looks can be deceiving.

Without a handful of monster deals, the market struggled to tread water in the June-September period.

Thanks to Electronic Arts Inc.'s 10-year lease for the 243,000-square-foot first phase at Playa Vista's Water's Edge complex and Warner Bros.' 15-year deal for the 455,000-square-foot Studio Plaza building in Burbank, more than 457,000 square feet was absorbed in the third quarter, according to Grubb & Ellis Co.

As a result, countywide office vacancy in the July-September period was 15.8 percent, down from 16.2 percent for the second quarter and 16.5 percent for the year-earlier quarter.

Still, without the EA deal, worth about $100 million over its term, the wider market essentially held steady.

Rather than taking vast chunks of space off the market, an indicator of business expansion, much of the activity was in lease renewals or modest movement to comparable space within submarkets.

The Westside's second-largest lease was Home Box Office's deal to move into 110,000 square feet at Santa Monica's Colorado Center (formerly MGM Plaza), leaving Century Plaza Towers in Century City. In the South Bay, where a whopping 258,000 more square feet of space was put back on the market than absorbed, Comerica Inc. was putting the finishing touches on a deal that would move its South Bay operations to the Atrium at Continental Park in El Segundo from the Century Boulevard corridor.

"There's moving around within the submarkets," said Matthew Miller, principal at CRESA Partners. "We see transactions but no net growth."

Meanwhile, landlords continue to be more aggressive with rental rates in order to spur activity. Class-A asking rates, down 7 percent over the past two years, have fallen for 10 straight quarters, dropping to $2.38 a foot from a recent high of $2.58 in early 2001, spurring activity from tenants believing that the bottom of the market is near.

"It's hard to imagine there's true tightening in the market," said Bruce Schuman, senior vice president at tenant rep firm Studley. "I would be hard-pressed to find a single deal where economics were better for the landlord than six months ago."

Outside the Westside, where the bulk of third quarter absorption was recorded due to the EA deal, the strategy appears to have worked. The downtown, Tri-Cities, San Gabriel Valley and San Fernando Valley markets none of which had increased asking rates were all in positive territory on absorption.

Downtown, a number of renewals and expansions for service-based firms in the 30,000 to 60,000-square-foot range caused the submarket to absorb more than 208,000 square feet during the quarter.

While Tri-Cities was largely buoyed by the Warner Bros. deal at 3400 Riverside Drive worth about $250 million smaller firms continued to absorb space in growing markets like Santa Clarita and the San Gabriel Valley.

Additionally, continued investment activity in downtown indicates the belief among investors that between some product being removed from the market through residential conversions and large tenants shopping for space, things will tighten up shortly.

On tap for conversion to residential use are the perennially vacant 1100 Wilshire and the Roosevelt Building, and major tenants SBC Communications Inc. and Bank of America are looking for more than 200,000 and 300,000 square feet, respectively. As a result, vacancies, which have hovered between 16 percent and 22 percent for the past three years, are expected fall further.

Investing interest

That prospect has fueled an ongoing rush of investment activity as buyers looked at the prospect of lower vacancies spurring an increase in rents in the not-too-distant future.

Third quarter deals included Mani Bros.' $105 million purchase of 801 Tower at 801 Figueroa St. and Beacon Capital Partners LLC's $90 million buy of a 50 percent share in Citibank Center. Meanwhile, Maguire Properties Inc. entered into an agreement to buy One California Plaza for $225 million while Transwestern Investment Co. is nearing a deal to buy Aon Center for about $120 million.

"There are more dollars than tenants chasing buildings right now," said Jim Kruse, executive vice president at Grubb & Ellis.

Meanwhile, countywide industrial vacancies hit their lowest levels in at least three years, as the third quarter vacancy rate was 3 percent, down from 3.1 percent for the second quarter and 4.1 percent for the year-earlier quarter.

In markets like Central Los Angeles and the San Gabriel Valley, where produce and import/export industries continue to thrive, the market was even tighter, with Central L.A. posting a scant 1.8 percent vacancy rate.

Because of the lack of available space, countywide sale and lease activity for the third quarter, at 12.1 million square feet, was up from 10.7 million square feet in the second quarter but down about 12 percent from 13.7 million square feet for the year-earlier quarter.

"There are 10 buyers for every property out there if it's priced within reason," said Bradford Broyles, senior associate at Grubb & Ellis. "There's nothing to choose from."

For reprint and licensing requests for this article, CLICK HERE.