Greater Absorption Balanced by Consistent Vacancy Rate

By DANNY KING
Staff Reporter

The countywide office market has been on a roll, tallying positive absorption in all but one of the last five quarters.

More than 600,000 square feet was taken off the available market in the January-March quarter. Meanwhile, developers have been champing at the bit to get projects under way.

The result is that as hundreds of thousands of square feet are leased up, the county's vacancy rate keeps hovering at just above 16 percent.

If anything, the market appeared to be in the midst of its usual game of musical chairs, with vacancy rates moving modestly if at all in the various submarkets.

Strength in Pasadena, for instance, was offset by slight increases in vacancies in Burbank and Glendale, leaving the Tri-Cities market flat at 12 percent, according to Grubb & Ellis Co.

"For quite some time, everyone was paralyzed because of the war and the economy," said Todd Doney, executive vice president at CB Richard Ellis. "The South Bay has the most challenging time ahead, but most of the other areas are doing well."

The numbers don't tell the whole story. But all signs point to a continued rebound in activity.

The largest tenant to take occupancy during the quarter, was Western Asset Management Co., which moved into 172,000 square feet at Maguire Properties Inc.'s Western Asset Plaza in Pasadena. (That deal was actually signed during the third quarter 2002.)

The largest lease signed in the quarter, Creative Artist Agency's deal anchor Century City's 2000 Avenue of the Stars in a 180,000-square-foot deal, will not be recorded until the 790,000-square-foot project is completed in late 2006. The agency will be vacating 90,000 square feet in Beverly Hills, so that deal would add to overall absorption.

Investment activity continued unabated, largely due to interest rates that remained near record lows. In downtown L.A., Milbank Real Estate Services bought the 280,000-square-foot building at 660 S. Figueroa St. for $62.4 million. Downtown's World Trade Center and 800 Wilshire building sold for about $53 million and $30 million, respectively.

"The downtown market is stable," said Bill Boyd, senior vice president at Grubb & Ellis, noting that rental rates that remain lower than the Westside and Tri-Cities have ensured steady occupancy and investment interest.

There also is plenty of opportunity for upside. With downtown's vacancy rate hovering just below 20 percent, despite several Class-B properties coming off the market for residential conversion, investors keeping churning the market in the expectation of seeing better returns.

The same trend has appeared in the South Bay and on the Westside.

In the El Segundo/Beach Cities submarket, Wells Real Estate Investment Trust paid about $90 million for the 310,000-square-foot Manhattan Towers in a deal that closed two days after the quarter's end. It is buying into a market where vacancies are now at 25.1 percent.

The investment activity carried over into other property types as a partnership that included Lehman Bros. and Pacific Coast Capital Partners bought Culver Studios for $125 million. Westside vacancies held steady from the prior quarter at 17 percent, while net absorption of 216,000 square feet was a healthy swing into positive territory.

Valley strength

The only submarket to show strength among all its component pieces was the wide San Fernando Valley area. Grubb & Ellis reported that vacancies declined in each of its five office markets even as new product came on line. As a whole, the San Fernando Valley market absorbed more than 377,000 square feet in the first quarter, nearly twice the level of the last quarter of 2003.

Mid-sized deals like Image Entertainment Inc.'s lease for 62,000 square feet in Chatsworth illustrate a West Valley market that has regained its footing, said David Solomon, vice president at CB Richard Ellis.

Meanwhile, Fremont General Corp. also made moves by taking 62,000 square feet at Santa Monica's Water Garden. Rand Corp., which will finish its 309,000-square-foot headquarters building later this year, became the first tenant of Maguire's 1755 Ocean Ave., taking 37,000 square feet there.

The countywide industrial market also remained active, both on the investment and leasing fronts. More than 13.1 million square feet was either sold or leased, up from 10.3 million in the prior period, as vacancies inched up one-tenth of a point to 3.3 percent.

Central Los Angeles remained the tightest and most active industrial market, with vacancies running at less than 2 percent.

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