The financial meltdown on Wall Street is having a ripple effect on Los Angeles County's office market, which could see millions of square feet of space quickly open up for lease.
Initial tallies indicate that nearly 8 million square feet of office space could be at risk.
The figure represents only about 4 percent of the county's 189 million-square-foot office market, but the damage could be significant in places like Century City, downtown and parts of the San Fernando Valley where there are concentrations of distressed firms.
Moreover, it all comes as the office market has softened after years of rising rents. The countywide vacancy rate hit 10.8 percent in the second quarter, more than a point higher than a year earlier.
"In an ordinary market we'd probably be able to reabsorb a lot of the space. However we are in a generally soft economy, so that is going to be a challenge," said Paul Habibi, a real estate lecturer at the UCLA Anderson School of Management. "It would most likely lead to a noticeable decline in rental rates and vacancies would tend to spike as a result."
Bankrupt Lehman Bros. Holdings Inc., bailed-out American International Group Inc. and Merrill Lynch & Co. Inc., which was recently acquired by Bank of America Corp., hold leases for prime space in Century City and downtown.
And any of that space that hits the market would follow what has already been dumped by Countrywide Financial Corp., which also was acquired earlier in the year by Bank of America. In addition, federal regulators that have seized Pasadena's IndyMac Bank are expected to break leases on dozens of branch sites across the region.
Givebacks could come as the troubled companies strike sublease deals with tenants or landlords head back to the open market with vacated space.
Of course, tenants see a silver lining: a respite from high rents.
"What the Westside has to understand is that $5 and $6 (per foot per month rents) don't fly," said Richard Ziman, chairman of AVP Advisors LLC and the former chief executive of Arden Realty Inc., an office investor and landlord.
In the heart of L.A.'s office market the 75 million-square-foot area that includes Brentwood, Century City and Beverly Hills in the west and downtown in the east there are six companies (Lehman, Merrill, Countrywide, IndyMac, AIG and its subsidiaries and the defunct Bear Stearns & Co. Inc.) that account for about 1.4 million square feet. That's roughly 1.9 percent of the market, according to CB Richard Ellis Group Inc. data.
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