Vacancies, Low Rents May Draw Some Firms Back to L.A.

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There’s no hiding the bad news.

With the economy still down and unemployment at a record high, it’s little surprise that commercial real estate in Los Angeles County continues to struggle.

Countywide, the vacancy rate hit 15.6 percent in the third quarter as more than 777,000 square feet came back onto the market. With the exception of the Santa Clarita Valley, Hollywood and the Tri-Cities area, every single submarket coughed up tens of thousands – if not hundreds of thousands – of square feet.

If there’s a silver lining – albeit a small one – it’s that some companies priced out of Los Angeles during the boom times may suddenly be able to afford it.

Brokers said they’re beginning to field phone calls from companies that were pushed out of the county when asking rents soared and vacancy numbers plummeted. Now, those same companies are finding they can get good deals locally.

It’s especially true of industrial companies that fled to the Inland Empire during the boom, when the industrial market was drum tight. Now, the market is flipped: The industrial real estate vacancy rate in the third quarter was 3.2 percent, with almost 32 million square feet of vacant space on the market, according to Grubb & Ellis Co. Asking rents have dropped to 48 cents a square foot, 9 cents lower than a year ago.

“Historically, the availability has been so tight and the cost so high that tenants often decided to locate out into lower-cost markets like the Inland Empire,” said Michael Frankel, managing partner with Rexford Industrial, a Brentwood-based industrial developer. “But a lot of things being equal, those companies would like to be in L.A. because it’s closer to where their executives live and a lot of their customers are out here. Now, we’re entertaining a lot of interest.”

Tenants are also switching offices within Los Angeles County to get into better areas at more favorable rental rates. For instance, Team Services Corp., a back-office support firm for media and entertainment companies, moved out of its offices in the north San Fernando Valley when executives realized that the company could afford a prime spot in Burbank closer to its customer base.

“Whereas price points might have been substantially higher two years ago, now they were such that it allowed them to take out a lot of space,” Frankel said.

Commercial down

Other than that, there was little positive to be found in third quarter figures. Submarkets already battered by the downturn continued to slide, with the San Fernando Valley, West Los Angeles and Wilshire Corridor all giving back hundreds of thousands of square feet.

Even the few bright spots came with caveats. The Santa Clarita Valley, for instance, absorbed 129,000 square feet in the third quarter, but almost all of that came from a one-off deal inked by Valencia medical device maker Advanced Bionics, which expanded into 144,000 square feet of space at the new Summit Oaks building.

The consensus among brokers and others in the industry is that the bottom may have been reached but things will continue to drag until businesses start hiring again. Some companies are likely holding “shadow space” – leased space that’s not occupied by any employees – off the market for now, meaning that more space could come onto the market in future quarters.

“We still have a good year to 18 months of negative office space absorption ahead of us, and you’ll probably see the vacancy rate stay stubbornly high,” said Dave Doupe, international director and West Coast team leader for Jones Lang LaSalle in Century City.

While landlords continue to be aggressive in trying to lock down existing tenants with short-term renewals, the recession is taking a toll on their ability to offer incentives. Average asking rents countywide have fallen to $3.06 per square foot, more than 40 cents lower from a year ago. Meanwhile, property values have fallen through the basement, putting a sizable dent in landlords’ bottom lines. That in turn has restricted the ability of landlords to pay for things such as office upgrades.

“One thing that is consistent countywide is that many landlords, and many tenants for that matter, do not have the ready cash to complete tenant improvements,” said Jim Kruse, senior managing director at CB Richard Ellis Group Inc. in Century City. “And we’re finding that to be part of the chasm between landlords and tenants when they try to make deals.”

And there’s little hope that the outlook for asking rents will brighten in the foreseeable future. The consensus among analysts is that rents could fall an additional 10 percent or so this year.

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