The slowing economy continues to wreak havoc on the Los Angeles County office market, with vacancies growing for a third consecutive quarter since the economy began to unravel last year.

Though landlords continued to raise rents in the second quarter the countywide average asking rent for Class A space was up 5 cents a square foot from the previous quarter to $3.55 the vacancy rate jumped to 10.8 percent from 10.1 percent. A year ago, rents stood at $3.10, with vacancies at 9.6 percent.

Even so, asking rents dropped in some submarkets, suggesting that landlords are beginning to concede that the high-flying days are over.

"I think we have a slowing economy, we won't have the job growth, consumer confidence is at its lowest level in 16 years and unemployment is up," said Joe Vargas, executive managing director at Cushman & Wakefield Inc. and regional manager for Southern California.

Still, Vargas holds out hope for an overall flat, rather than significantly depressed, year for the regional market. "I believe we are going to have a stable year with no huge growth or decline in vacancies," he said.

So far this year, high-end office locales have provided the market with some stability. Tony Westside enclaves like Century City and Westwood have experienced year-over-year decreases in vacancy along with increased rents.

Those areas, according to Vargas, are continuing to do well because of their location. "It's very much quality of life, the intellectual capital that is there and everything that goes with it," he said.

But a look at secondary and tertiary submarkets reveals damage already done. Areas like the San Gabriel and Santa Clarita valleys, and the South Bay had negative net absorption, which means that there was less space occupied by tenants at the end of the second quarter than at the beginning of it. In the 187 million-square-foot Los Angeles County market, there was 20 million square feet of vacant space in the quarter.

An economy cooled by last summer's residential mortgage meltdown is the culprit. While Orange County has been hit hard by the exodus of subprime lenders, parts of Los Angeles that also were home to lenders and support services have also been impacted.

"That increase in vacancy can almost all be attributed to the meltdown of the subprime industry," Vargas said. "The ripple effect has gone into residential housing, other mortgage companies and commercial office."

The San Fernando Valley and Marina del Rey-Culver City submarkets were among the hardest hit last quarter.

In the Valley, vacancies hit 12.2 percent, up considerably from the first quarter rate of 9.7 percent and 6 percent a year ago. Even more troubling, the area had a negative net absorption of 291,936 square feet, and the market still has 347,864 square feet of space under construction. That marks the second straight quarter the submarket has experienced negative absorption of at least 270,000 square feet. Still, the average asking rent of $2.85 per square foot was up slightly from last quarter.

Marina del Rey-Culver City faired poorly despite some very high-profile lease deals. In that submarket, the vacancy rate was 17.5 percent, up considerably from the first quarter's 15.5 percent and 8.1 percent a year ago.

The submarket gave back 80,062 square feet of space, and an additional 459,917 square feet was under construction. Much of that future space is located at massive mixed-use developments in Playa Vista that include projects by New York City-based Tishman Speyer Properties LP and Dallas-based Lincoln Property Co.

Deals signed at those projects have been a bright spot for an otherwise moribund submarket. In the larger of the two deals, Fox Interactive Media signed a 12-year lease for 421,000 square feet at Lincoln's forthcoming project and will move its MySpace operations there. Fox Interactive, a unit of News Corp., plans to move into the space next summer.

Industrial demand

In comparison to a rough office market, the county's industrial scene is showing signs of resiliency. The vacancy rate was up slightly to 1.8 percent from 1.6 percent in the first quarter.

A fundamental lack of developable space means the market has remained very tight, but the market also is being boosted by rising energy costs.

In submarkets further from the Port of Los Angeles, like the San Gabriel Valley and the Inland Empire, vacancies were up. But in the Mid-Cities area, which includes Norwalk, Paramount and Cerritos, the vacancy rate was 1.3 percent down from 1.4 percent last quarter and 2.4 percent a year ago.

"Given higher energy and transportation costs, location for industrial tenants had become more important than ever," said Michael Frankel, chief financial officer of Los Angeles-based industrial developer Rexford Industrial LLC. "You are seeing a reduced price advantage to going out to the Inland Empire."

Frankel said that of Rexford's 1.09 million-square-foot leasable industrial portfolio in the county, only 45,374 is vacant. In the last six months his firm has leased 125,669 square feet of space.

"We have had a robust six-month period," he said.

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