The first quarter of 2010 wasn’t great for Los Angeles County’s office and industrial markets. But these days, that’s a cause for guarded optimism, at least compared to a year ago.
While commercial real estate space is still returning to the market and vacancy rates are on the rise, there’s an inkling that stability has started to take hold. Granted, brokers can be an optimistic bunch, but even some landlords think that the market has bottomed out – though even the most optimistic believe it will take several quarters of mixed results before a full-on recovery.
“By no means are we over it; the fundamentals are still weak,” said Bob Safai of Madison Partners, a broker who handles investment sales and leasing. “We have companies contracting, and we have the economy and unemployment truly affecting real estate markets.”
Indeed, the first quarter numbers are actually a bit hard to swallow. About 1.13 million square feet of office space came back on the market in the quarter, worse than the fourth quarter when firms vacated about 451,000 square feet. Still, that’s better than the 2.48 million square feet of negative net absorption posted in first quarter 2009. The average countywide Class A asking rent reflected that, gaining a cent since the end of the year to $3.03.
During the recession, businesses have shied away from long-term leases, unwilling to commit to large deals during a time of uncertainty. However, with the slow thaw in place, more tenants are willing to broker bigger leases, if the financials make sense, brokers said. Even Wall Street has latched on to the optimism, boosting the share price of real estate industry trusts, including Maguire Properties Inc., owner of the U.S. Bank Tower and other downtown highrises.
Given all that, it’s still a fine time for tenants to strike deals in many submarkets, where asking rents have dropped from last quarter, and are off considerably on a year-to-year basis, despite the average countywide improvement. The West L.A. office submarket, one of the most desirable in the county, is emblematic of the current state of the commercial real estate market.
The average Class A office asking rent there was $3.81 last quarter. That’s down five cents from the previous quarter, and 10 percent from a year ago when landlords were asking for $4.21 on average. It makes sense that rents would be falling in West Los Angeles; the submarket gave back more than 325,000 square feet and the vacancy rate was 16.4 percent, up more than a point since the end of the year.
While investment sales transactions in the county have picked up considerably since the dark days of late 2008 and early 2009, the business that remains is dominated by distress. Most of the larger deals were the result of some sort of trouble, oftentimes foreclosure.
For example, in one of the biggest recent sales, Shenzhen New World Group paid $63 million for the Los Angeles Marriott Downtown Hotel. It was sold by Leeward Strategic Properties, which took over the foreclosed property, formerly owned by bankrupt businessman Ezri Namvar, who paid $109 million for it in 2007.
“You are going to see more and more of that,” said Safai, who believes that the market won’t truly rebound until 2012.
Industrial update
The industrial market may be a bit weaker than the office side. One year ago, the industrial market gave back a whopping 3.96 million square feet. By comparison, it only gave back 314,009 square feet last quarter. Some could view that as success – but not so fast.
Some area brokers said that the market still has a long way to go. In most submarkets, asking rents are down from the previous quarter and tenants are still looking for short-term deals. Countywide, the asking rent for industrial space was 46 cents, down one cent from a quarter earlier and 13 percent from a year ago. However, some landlords said they have noticed an improvement.
“You are seeing a marked increase in movement on tenants looking to capitalize on a market, or move because they have to,” said Michael Frankel, managing partner at Rexford Industrial, a developer and landlord of industrial property.
Frankel said his company did about 300,000 square feet in renewals and new leases in first quarter 2010, after handling 1 million square feet of leases for all of 2009, with most of the activity coming at the end of the year.
Still, when deals are completed, it’s typically after a lengthy, exhaustive process, said Adam Dzierzynski, a leasing and investment sales broker at Lee & Associates.
“Every tenant in the market first has gone to their landlord and said, ‘I want you to reduce my rent by 50 percent.’ If he can’t get the reduction, then he goes out to the market and he’s got 10 choices and he’s going to go with whoever gives him the most free rent and the cheapest deal,” said Dzierzynski.
