Shrinking vacancies in the Los Angeles County office market and little new construction on the horizon have set the stage for a landlord's market for much of the coming year.

Led by the Westside and Hollywood areas, the countywide vacancy rate dropped to 9.5 percent in the fourth quarter compared to 11.2 percent a year ago, according to Grubb & Ellis Co. Even more impressive was a 13 percent jump in average rents for Class A space to $2.86 a square foot.

"Businesses have been cautious about expansion, but our sense is that they can no longer put it off and there's a lot of sticker shock going on," said Joe Faulkner, executive vice president at Charles Dunn & Co. "There's a terrible supply constraint in this market."

West Los Angeles' vacancy rate slipped by more than two points over the past year to 6.4 percent, with rents soaring 20 percent to $3.49 per square foot. Only Santa Monica at $4.83 and Westwood at $3.87 have pricier space, with both sub-markets appreciating by more than 30 percent.

And with Hollywood now joining West Hollywood as a trendy business address, vacancies in the combined sub-market plunged from 11 percent to 4.9 percent, with asking rents jumping about a quarter to $3.15 per square foot.

Desirable suburban communities also are seeing significant appreciation, said Faulkner, noting that a client he placed in Calabasas two years ago at $2 a square foot is now faced with paying $3 to expand its space.

Rents will continue to rise in the region, industry observers predict, because the available supply of space is shrinking and a healthy regional economy and job growth is putting a strain on existing facilities. In addition, with the number of office buildings that have changed hands over the past two years, there are plenty of new investors with high expectations for properties for which they paid record prices.

"The biggest issue we have in the commercial real estate services business is inventory," said Lew Horne, Greater Los Angeles executive managing director for CB Richard Ellis Group Inc.

Indeed, the 780,000-square-foot 2000 Avenue of the Stars at Century Park that his company inherited in its Trammell Crow Co. acquisition was already 60 percent leased when it opened last week.

High costs

There has been little new construction in the county because construction costs are high and development sites in desirable markets are hard to find. Thomas Properties Group Inc.'s El Segundo Corporate Campus, a former Rockwell plant, and the former Nissan Motor Corp. complex in Gardena, are among the few large parcels available.

And while vacancy rates and average asking rents in downtown Los Angeles didn't change much over the year, ending the year at 14.1 percent and $2.86 a square foot respectively, redevelopment and the tight Westside market will combine to boost the downtown in 2007.

"As the surrounding markets improve and downtown continues to see a resurgence, particularly with LA Live coming, downtown is now seen as a viable alternative to the Westside," Horne said.

Glendale and LAX/Century Boulevard Corridor are among the few sub-markets not yet participating in the boom. Glendale, the only community whose vacancy rate was higher than a year ago (increasing to 16.2 percent from 13.9 percent) suffered from a glut of Class A space as major tenants such as Walt Disney Co. reduced their space.

Meanwhile, neighboring Burbank and Pasadena haven't been this hot since the height of the dot-com boom, with vacancies in the two communities ending the year at 3.6 percent and 4.7 percent, respectively. Still, rising vacancies didn't erode Glendale rents, which rose 4.5 percent to $2.58, but they still lag the $3.00 plus rents in Burbank and Pasadena.

The LAX/Century sub-market, which ended the year with a 31.4 percent vacancy rate, suffers from different constraints. Much of its Class A space is aging and high L.A. city taxes put the area at a disadvantage to communities south of the airport competing for tenants seeking affordable Westside-adjacent offices.

Even so, the area has seen some positive net absorption over the past year and Class A rents inched up 4 cents to $1.57. "Typically what tends to happen is that when the Westside office market gets hot, tenants tend to bypass the airport and head to El Segundo, which has good amenities and a lot of service-oriented companies there," said J.C. Casillas, Grubb & Ellis' regional research services manager. "It's the very economically conscious tenant that will go to LAX."

But as rent appreciation continues, Casillas said investors may finally consider it worthwhile to acquire and upgrade LAX/Century properties, providing an overdue boost to the county's weakest submarket.

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