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Tuesday, Jul 5, 2022

Slow Market Gives Tenants Upper Hand in Negotiations

Slow Market Gives Tenants Upper Hand in Negotiations

Westside

By BENJAMIN MARK COLE

Contributing Reporter

Aside from one major lease deal near Marina del Rey, the action in West L.A.’s office market was so sleepy during the second quarter that even determining real rents and office building values was mostly guesswork.

“On the sales side of the market, there is a big gap between what owners want for their buildings, and what buyers are willing to offer. The result is that no transactions are happening,” said David Rosenthal, partner with Westside-based real estate appraisal house Curtis-Rosenthal, LLC. “Without transactions, you don’t have comparables.”

Rents are similarly squishy. According to figures provided by Grubb & Ellis Co., the asking rent per square foot of office space on the Westside was $2.89 in the second quarter, down from $2.93 in the previous three months and $3.14 for the like period a year earlier.

The office vacancy rate hit 15.7 percent during the second quarter, up from 15.1 percent in the first quarter and 11.7 percent in the year-earlier period.

But there is a big difference between what surveys report and what brokers say they can do, especially if tenants are looking for short-term leases.

“Right now, you want 10,000 square feet, and you are willing to sublease? I can get you 10,000 square feet, for three years, at $1.50 a square foot, in a Westside Class-A building,” said Vincent Pellerito, senior director with Cushman & Wakefield Inc. “And I am probably being generous. I know of one brand-name Westside building I could get you in for $1.25 a square foot.”

Many tenants inked long-term contracts at the height of the market, in the late 1990s or 2000, when rents topped $3 and often $4 a square foot. Now, many tenants are hurting for money. “There are tenants trying to restructure their leases to bring them back to current market rates,” Pellerito said.

Craig Meyer, senior vice president with Colliers Seeley International Inc., put it more bluntly: “We are seeing the renegotiation of existing leases …it is a tenant’s market.”

The deal near the Marina had BAE Systems Controls signing a long-term lease for 150,000 square feet of space at Wateridge Two, in a transaction valued at $47.6 million. Crown Realty & Development is owner of the property.

But this relatively large lease was seen as the exception during the second quarter. Landlords, eager to keep floor space filled and not sensing any new demand, often have little choice but to bend with the wind.

Even so, no one is comparing the current sluggish activity with the glut of space seen in the early 1990s. Then, a building boom was followed by a multi-year recession, in which 10 percent of jobs in Los Angeles County evaporated. “I think we will hit bottom, if we haven’t already, at the very latest in the third or fourth quarter of this year,” said Pellerito.

Lenders have been cautious to extend much cash, even before the current economy slowed, and the tech wreck hit West Los Angeles.

Also, in the past several months, companies have been either laying off people or keeping their staffing levels steady. Spending is being watched very closely, so the amount of capital expenditures has declined. Furthermore, recent corporate scandals mean balance sheets are being closely scrutinized, which doesn’t provide incentives for shopping for office space. Retrenchment in the entertainment industry has also added to the problem.

While Westside office markets were soft in the second quarter, residential and retail markets stayed strong, said Rosenthal. Anybody who can get permitted to build multi-family on the Westside does so, as rents are stiff.

Only the very toniest rental addresses saw any decline in rents in the second quarter, said Rosenthal, and multi-family apartments held their values, or even increased a bit. “There are too many dollars chasing too few apartment deals,” concluded Rosenthal, who speculated that perhaps money leaving Wall Street was trying to find a home. “There is nowhere near enough product to satisfy the demand for Westside apartments (as investments).”

And despite the recession, retail rents in West Los Angeles remain high, in certain markets. After conferring with industry experts, Rosenthal last week issued an online newsletter that reported some rents on Beverly Hills Rodeo Drive reaching as high as $20 a square foot in the second quarter, while Santa Monica’s trendy Montana Avenue saw rents up to $6 per square foot. Such rent levels are on par with the highest seen in the region, even in the late 1990s. “At least in West Los Angeles, retailers are willing to pay for the best locations,” said Rosenthal.

Westside

Major Events:

– BAE Systems Controls signed a long-term lease for 150,000 square feet of space at Wateridge Two, in a transaction valued at $47.6 million. Crown Realty & Development is owner of the property, which lies on a parcel of land on unincorporated Los Angeles County land near Marina del Rey.

– Law firm Alschuler, Grossman, Stein & Kahan LLP signed a lease for 85,000 square feet, agreeing to move from Century City to the Water Garden in Santa Monica at the end of July.

– Water’s Edge, a 250,000-square-foot office building at Playa Vista co-developed by Los Angeles-based Maguire Partners and Chicago-based Equity Office Properties Trust, moved nearly to completion, but signed no tenants in the second quarter.

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