Could downtown L.A.'s office boom be in for a premature end?
That's what some commercial brokers are arguing, despite vibrant building sales and a recent uptick in occupancy rates. They say a looming glut of prime office space coming onto the market in the next two years can only push rents lower.
That's in sharp contrast to recent reports from Cushman & Wakefield Inc., and to a milder extent other brokers who paint a rosy picture of a downtown Los Angeles market on the rebound. Cushman, which caters mainly to landlords, has boldly predicted a 7 percent increase in downtown rents by year's end.
But looking at downtown's 27 Class-A office towers those that can command higher rents and typically attract corporate tenants a different picture begins to emerge. Those buildings contain 21.2 million square feet of space and are currently advertising space of 4.6 million feet a 21.5 percent vacancy rate, according to data from tenant representative firm Studley.
That's far higher than the 17.8 percent first-quarter vacancy rate for downtown that was published by Grubb & Ellis Co.
Grubb & Ellis, like many other brokerages, looks at a larger segment of downtown office buildings, including lower-quality properties that are increasingly being taken off the market for conversion to residential use.
Grubb officials believe the downtown market remains strong and will improve.
"Overall, in downtown, rents will go up and vacancies will decrease," said JC Casillas, research analyst for Grubb & Ellis. "That is what we're looking at."
Even though those properties have been re-made into apartments and condominiums, few new tenants have entered the market.
In fact, Studley found that downtown office tenants today have a smaller presence, and by extension a leaner workforce, than five years ago.
The cumulative net absorption in downtown Los Angeles the difference between the amount of office space leased and the amount put back on the market, has actually declined since 2000, Studley reported.
That's because downtown is still feeling the aftershocks of having numerous corporations either move out of the market or get acquired during the early-to-mid 1990s.
And until new companies move into downtown and fill that void, the situation isn't likely to get better.
"Downtown won't change until we get tenants moving into downtown from outside of downtown," said Stephen Bay, an executive vice president at CB Richard Ellis Inc. "Until that happens, we're basically stuck in a game of musical chairs where tenants hop from one building to another."
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