Higher office occupancy, particularly in Westwood, boosted rental rates in 2005's fourth quarter as the Westside continued to rebound from the post-tech doldrums.
Acquisitive retail and residential developers could further squeeze the market this year.
"The Westside leasing market is getting as tight as a drum and it's getting harder and harder to find any substantial blocks of space in virtually all the markets," said Blake Mirkin, senior vice president at CB Richard Ellis Group Inc.
Overall vacancies in the market dropped to 8.8 percent in the last quarter of 2005 from 14.8 percent at the close of 2004, according to figures from Grubb & Ellis Co. With large spaces mostly leased, the number of transactions slowed in the last half of the year with the vacancy rate dropping just 1 percent from 9.8 percent in the third quarter.
The growth in demand for residential development and the amenities that go with it also could create an interesting market dynamic in 2006, according to Mike DeSantis, senior director with Cushman & Wakefield Inc. He expects a bidding war as developers vie for opportunities.
"Residential condo and retail developers will continue to outbid office developers for any available land where any of those uses are allowed," DeSantis said.
Westwood is largely responsible for the improving numbers, especially the 10960 Wilshire Blvd. building. Long the site of large blocks of vacant space that skewed the submarket's numbers for several quarters, the building began to stabilize in the last half of 2005. As a result, Westwood's vacancy closed 2005 at 8.2 percent, a dramatic drop from the 21 percent recorded in the fourth quarter of 2004.
Santa Monica posted the lowest vacancy in the fourth quarter at 7 percent, down from 7.6 percent in the third quarter and 12.6 percent a year earlier.
The highest vacancy rate on the Westside was in Century City, which closed the year at 11.2 percent, down slightly from 11.5 percent in the third quarter and 17.2 percent in the fourth quarter of 2004. Metro-Goldwyn-Mayer Inc. changed its strategy on its 350,000-square-foot sublease at 10250 Constellation Blvd. After holding out for full-floor transactions, the firm began marketing the second and third floors on a short-term basis. The asking rate is $2.50 per square foot, below the $3.02 average asking rate for Class A space there.
"The offering is significant because they can't do multi-tenant floors without incurring significant costs," says Neil Resnick, executive vice president/managing director of transaction services with Grubb & Ellis.
There has not been much activity at the 790,000-square-foot 2000 Avenue of the Stars project. Only a handful of pre-lease deals were inked in 2005. Still, the building is asking $4 per square foot. "They feel they'll start benefiting from those tighter markets in 2006," said Chris DuMont, senior vice president with Grubb & Ellis.
Century City's lone lease transaction of note was Stroock & Stroock & Lavan LLP's renewal and expansion at 2029 Century Park East. Financial consideration for the 10-year, 62,500-square feet was unreported.
Two tenants will put additional square footage back onto the market. Pacific Capital Group and its wholly owned Rubin Chambers Dunhill Insurance Services unit will vacate 1919 Avenue of the Stars in early 2006 and move into 20,000 square feet at 9355 Wilshire Blvd. in Beverly Hills. The new 10-year lease, estimated to be worth more than $20 million, takes up half the building.
With few new office projects expected in 2006, the Westside could remain a landlord's market as owners leverage higher occupancy for higher rents and early renewals. Average asking rates for Class A space rose 19 cents in 2005 to $2.90 per square foot. Class B rates also rose, up from $2.51 per square foot at the end of 2004 to $2.63 at the close of 2005.
Consider Brentwood, where Class A rates rose 24 cents on the year. "The World Savings building, jewel of the Arden Realty Inc. portfolio, is asking $3.25 to $3.75 for its office floors," said Grubb & Ellis' DuMont. "That's up from the $2.35 to $2.40 they were asking in 2004, when they were doing a ton of leasing there."
Santa Monica's low vacancy rate helped drive the Westside's largest increase in Class A rates, up 34 cents from a year ago to $3.48 per square foot.
The Westside's lowest asking rates were in the Marina Del Rey/Culver City area at $2.40 per square foot for Class A space and $2.17 per square foot for Class B. Though low, rates were on the rise in 2005, driven by declining overall vacancy, which dropped 7.4 percent to 8.4 percent at year-end.
The dynamic is due to two factors, Mirkin explained. "If the rates in Santa Monica are averaging $3, the $2 range in Culver City is still considered economic." Another factor was decreasing office inventory caused by conversions. "In some areas like Marina Del Rey, what was office and industrial space is being converted to residential," Mirkin said.
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