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Tuesday, Jun 6, 2023


Is it just a blip? Is it more significant?

Those were some of the questions raised in the wake of a less than stellar first quarter in L.A. commercial real estate.

Indeed, the January-March bottom line was somewhat sobering: For all of L.A. County, office tenants moved into only 14,136 square feet more space than they vacated. In the fourth quarter of 1998, the figure was 934,385, according to Cushman & Wakefield Inc.

In fact, a net loss of tenants was suffered by several office submarkets during the period, including downtown, parts of the Westside, the San Fernando Valley and downtown Long Beach.

Not that anyone is panicking. In fact, most real estate watchers downplay the slow start, pointing out that part of the sluggishness could be seasonal.

“Commercial real estate leasing activity is almost always slow in the first quarter. People sort of crank down their (previous year’s activities) and it takes awhile to get going again,” said Mark Sullivan, senior managing director at brokerage firm Julien J. Studley Inc.

Added Brad Cox, Cushman & Wakefield’s senior managing director for the Pacific Southwest: “Generally, the first quarter is one of the softer absorption quarters and particularly this year, it’s reflective of pricing in the marketplace. Prices are at a point where tenants are really evaluating relocation alternatives in light of where we are in the business cycle. They take a good hard look and are a little hesitant about making a commitment with rates at the level they are.”

On a market-by-market basis, first quarter activity also reflected the pace of last year’s activity.

The office markets with the strongest first-quarter performances (in terms of net absorption) still have some of the highest vacancy rates. Those include the South Bay and Wilshire Center. Meanwhile, some of L.A.’s hottest markets in recent years, most notably the Westside, are seeing their level of activity taper off, as tenants grapple with sticker shock.

“The latter part of the fourth quarter and the first quarter, everyone was digesting what occurred last year, because there was a lot of activity,” said David Thurman, partner with Concorde Real Estate Partners. “The lower-priced stuff people are gobbling up.”

Asking rents edged up countywide in the first quarter, but only slightly from $1.75 at year-end 1998 to $1.78 as of March 31, according to Cushman & Wakefield. The countywide vacancy rate inched up to 15.1 percent, from 14.8 percent at year end.

Brokers said that despite spotty growth in the quarter, there are still plenty of new tenants, particularly technology-related ones. And that means there is still room for rents to rise.

Meanwhile, demand in the industrial sector continues to outstrip supply in all markets, with the possible exception of the Inland Empire, said David Hasbrouck, executive director at Cushman & Wakefield. But lenders are becoming dubious that the breakneck pace of rental growth over the past 24 to 36 months can continue unabated.

“I see financial partners and lenders are more cautious in projects they’re proceeding with; however, we do see continued speculative activity in markets where it’s justified by leasing activity and rents,” Hasbrouck said.

Caution, in fact, has been the buzzword among lenders since last fall’s turmoil in the capital markets. “There is continued easing (among lenders), but they’re still cautious,” said Michael Cohen, president of M.A. Cohen & Co.

Besides lender caution, Cohen said, another factor contributing to the sluggish deal flow is incompatible expectations. “Buyers have expectations that sellers should be more reasonable, and sellers have expectations based on the flurry of activity a year ago,” he said.

Meanwhile, fundamentals remain strong, even though the vacancy and rental rates did not improve in the first quarter as quickly as they had in recent quarters past.

That’s especially apparent on the Westside, which boasts some of the lowest vacancy rates and highest rents in the county. The Westside did see office tenants move out of 116,900 more square feet than they moved into during the first quarter, causing the vacancy rate to inch up to 9.6 percent, from 9 percent at year-end 1998.

“A year ago, there was more of a feverish pitch in the market and you were seeing rates escalate faster. Now you’re not seeing the same huge jumps,” Thurman said.

The larger first-quarter lease deals on the Westside resulted from growth and expansion of entertainment-technology companies in Santa Monica.

“That’s where a lot of action is,” said Matthew Miller, with brokerage firm CRESA Partners. “A lot of times you see companies moving from one submarket to another. This is one industry where you’re seeing net growth.”

Several Westside submarkets have retained single-digit vacancy rates, including Beverly Hills, Santa Monica, West L.A., Westwood and especially Century City, with a vacancy rate of 7.4 percent.

Stan Gerlach, senior vice president at CB Richard Ellis Inc., said he’s not seen Westside office vacancies as low in the past 20 years as they are today. And even with more than 1 million square feet of new office buildings under construction in Santa Monica, he expects continuing strength.

“The new construction doesn’t scare me because they have a lot of pre-leasing activity,” Gerlach said. “There’s not a lot of big blocks of space, and the Westside continues to be a desirable place.”

The South Bay, which for years has had some of the highest office vacancy rates in Southern California, also is becoming a hotbed of construction activity, with almost half a million square feet of office space in the works. Many the South Bay’s submarkets continue to post vacancy rates near or in excess of 20 percent. But its largest submarket by far, El Segundo/Manhattan Beach, has the lowest vacancy rate in the South Bay, at 11.7 percent, according to Cushman & Wakefield. That’s a 2.1 percent improvement from year-end 1998, thanks to tenants absorbing 255,072 square feet of space in the first quarter, more than any other submarket in L.A. County.

“The South Bay is gradually improving,” said Jim Biondi, senior vice president with Grubb & Ellis Co.

Another area posting a strong quarter was the Tri-Cities, where office tenants moved into 211,000 more square feet of space than they vacated during the period. That growth was fueled by professional service tenants, such as insurance, financial and law firms, as well as by high-tech firms, more than by entertainment companies.

Burbank’s Media District continues to be one of the L.A. area’s tightest submarkets, with a 6 percent vacancy rate, down from 7.3 percent at year end. Pasadena tightened to 9.6 percent, down from 11.2 percent at year end, according to Cushman & Wakefield.

“What helped (Pasadena) tremendously is when Burbank and Glendale hit single-digit vacancies 18 to 24 months ago, and it was the only outlet. The most available space in 1998 was in Pasadena and rents had not begun to accelerate there,” said Bill Boyd, senior vice president at Grubb & Ellis.

Over in downtown L.A., several lease deals were signed in the quarter, but that market was also dealt more than its share of blows. Huge blocks of space were released onto the market due to downsizings, relocations and mergers. That pushed up the office vacancy rate for the Central Business District from 17.3 percent at year-end 1998 to 18.9 percent at the end of the first quarter. Downtown office rents remained flat during the period, albeit 7 percent higher than a year ago.

Several large blocks of sublease space that had been sitting vacant expired, flooding downtown with a wave of direct-lease space, including Atlantic Richfield Co.’s long-vacant 245,000 square feet of sublease space at 1055 W. Seventh St.; Wells Fargo Bank’s 98,000-square-foot sublease in the Wilshire Bixel building at 1055 Wilshire Blvd.; and Ernst & Young’s 190,000 square feet in Arco Plaza. In addition, Sempra Energy is seeking a tenant to sublease more than 200,000 square feet in Library Tower and Gas Company Tower.

Sublease space typically rents for considerably less than direct-lease space, so until all that space is absorbed, there won’t be any spike in rents, said Brian Ulf, vice president at Cushman Realty Corp.

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