REAL ESTATE QUARTERLY - L.A. County
Activity Swings Up, but Market Still Seeks Return To Full Stride

By PAT MAIO
Staff Reporter

The Los Angeles County office market is ever-so-slowly firming up with second-quarter vacancy levels generally falling from year-ago and first quarter levels, and asking rental rates holding mostly steady.

The improvement was spotty, with highlights in parts of West Los Angeles, in mid-Wilshire and the western part of the San Fernando Valley. But while chronic high vacancies persisted in submarkets such as the South Bay, downtown and Hollywood, these areas also appear to be gathering momentum.

Absorption, the amount of space newly occupied less the amount put on the market, remained positive at 535,123 square feet countywide, although the pace of absorption slowed from 725,264 square feet in the first quarter.

Office vacancies in the April-June period totaled 15.7 percent, compared with 16.1 percent in the previous three months and 16.2 percent in the year-ago second quarter, according to Grubb & Ellis & Co.

While Class A asking rates slipped slightly to $2.41 from $2.42 in the first quarter, Class B rates rose a penny during the same period to $1.94 per square foot.

"Activity has definitely been increasing since the beginning of the year, but the absorption of space has not quite hit its stride yet," said John Ayoob, executive vice president of CB Richard Ellis.

In West L.A., the year-to-date positive absorption of 315,135 square feet of space can't be attributed to one major transaction. Instead, it is due to several medium-size to large-size deals, ranging from 20,000 square feet to 75,000 square feet.

Signs of improving economy

These medium-sized transactions are a reflection of the slow but positive growth of the economy and may portend a pattern. But there remains a ways to go before the market, which has suffered since the dot-com bust, can be declared sound.

Downtown Los Angeles has one of the county's highest vacancy rates, rising slightly to 20 percent in the second quarter from 19.8 percent in the first. Similarly, rents there have remained flattish.

Asking rents for Class A office space in the second quarter were $2.58 per square foot, up 2 cents a square foot from the previous quarter.

Some brokers don't see much change in this submarket until a strong marketing push by the owners of Arco Plaza on South Flower Avenue plays out with the filling up of its two high-rise towers.

Thomas Properties Group Inc. purchased Arco Plaza for $270 million early last year, and since then has mounted a concerted effort to lure tenants from other office buildings in the downtown area, said Stephen Bay, executive vice president with CB Richard Ellis. This push, he said, has strengthened in the past three months.

The carrot to get tenants to move there is an offer of free rent through 2006 or 2007. This is how the prospective tenants can avoid having to pay double rent should they decide to move into the towers, explained Bay.

"No tenants will move and pay double rent if the lease on their old location hasn't expired," he said.

That's having a broader impact on the market. "Arco is forcing all landlords to play ball to keep their existing tenants," he said, adding that such a strategy is keeping a lid on rates, and may even force rents to fall as competition for tenants heats up.

The largest lease deal signed during the second quarter was SBC Communications Inc., in the downtown Los Angeles area. The 10-year deal was valued at $50 million for 225,000 square feet at the Transamerica Center. The deal also includes rights to add signage atop the 777 S. Figueroa St. building.

Other major county deals in the quarter were located in downtown L.A. as well. These included a Marsh Inc. lease signed for 165,088 square feet at 1150 S. Olive St., and Buchalter Nemer Fields & Younger at 1000 Wilshire Blvd.

In the Tri-Cities, strength in Pasadena was offset by slight increases in vacancies in Burbank and Glendale, leaving the submarket flat overall at 12.4 percent.

Tom Bohlinger, senior vice president of CB Richard Ellis, said rents in these areas probably won't rise measurably until more new office development projects emerge.

Among the biggest office projects under way is the IDS Crown City Center project, a 230,000-square-foot office development on Lake Avenue in Pasadena, scheduled for completion in May 2005. "Rents will have to strengthen before we see more office developments," Bohlinger said. "We are getting closer."

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