Office markets nationwide have begun to feel the effects of tenant contractions as leases signed before the recession start to expire. And the Los Angeles County commercial real estate market is no exception.
The market returned nearly 570,000 square feet during the fourth quarter, causing last year to end very much as it began – and putting a halt to what appeared to be a nascent recovery.
Arty Maharajh, a senior research analyst with Transwestern, said the lackluster quarter, which was driven by downsizing among professional service tenants, is a sign that L.A. real estate isn’t likely to bounce back just yet.
“It’s too early to see a trend, but it definitely signifies that it’s going to get worse before it gets better for highly concentrated financial and professional service hubs,” Maharajh said.
Reflecting contractions in several markets, the office vacancy rate jumped three-tenths of a point to 18.2 percent in the fourth quarter, according to Jones Lang LaSalle Inc. Class A asking rents rose two cents to $2.81.
Brokers had hoped for – and even predicted – a rebound by the end of 2011. But that recovery has stalled as five- or 10-year leases prior to the recession have expired and tenants have opted to downsize to reflect staff cuts and consolidation.
The problem has swelled for landlords across the county, causing defaults and foreclosures to rise. In the city of Los Angeles, the regions hardest hit have been centers for professional service employers. Downtown, for example, returned more than 536,000 square feet during the fourth quarter.
Although several tenants renewed leases downtown during the period, most renewals represented a contraction. Notably, the Southern California Gas Co. reduced its lease at its namesake Gas Co. Tower by 200,000 square feet.
Steve Solomon, managing director with Jones Lang LaSalle, tied the negative net absorption to continued economic concerns.
“Big picture, it’s about the same. Unemployment is still higher than most of the country,” said Solomon. “When we start seeing it get closer to 10 percent, that’s when we start to see a pretty dramatic change and positive absorption.”
Meanwhile, entertainment and tech hubs remained a consistent bright spot during the fourth quarter.
Jim Kruse, senior managing director of the Los Angeles south region for CBRE Inc., said technology remains the driving force for the office market, despite a slight slowdown during the quarter.
“Any market where we’ve got some technology is good news,” Kruse said. “Santa Monica has had a great technology boom, though it’s slowed down this last quarter.”
Markets such as Playa Del Rey and El Segundo have benefited from the Westside’s boom as tenants looking for cheaper rent have headed south.
El Segundo, for example, was home to the largest lease deal in California since 2000 when DirecTV signed a 15-year contract for 630,000 square feet at the Kilroy Airport Center.
But while the office market has struggled to pick up, the industrial market has faired better. The county vacancy rate dropped to three-tenths of a point to 5 percent as the market absorbed 1.7 million square feet.
In the South Bay, one of the drivers of the county’s industrial office market because of its ties to the ports, Class B office space did especially well as companies looked to expand without emptying their wallets.
“That was good news for everybody down in the South Bay,” Kruse said. “It’s not like life is wonderful but it’s getting a little bit better.”
But despite some growth areas, Transwestern’s Maharajh warned that recovery won’t occur if the office market continues to see contractions.
“Some areas might be bustling now,” he said, “but we are nowhere near a place where we can confidently say this market has made the proverbial turn and we’re headed in the right direction.”
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