Sublease/15″/dt1st/mark2nd

By ELIZABETH HAYES

Staff Reporter

When examining the troubled downtown office market, Aames Financial Corp. provides an interesting case study.

Less than two years ago, the Los Angeles-based financial services company announced plans to move its 700 employees into one of downtown’s most prestigious skyscrapers, Two California Plaza. At the time, its signing of a 15-year lease for seven floors was heralded as a boon to downtown.

“This helps the downtown market by soaking up excess space and raising its prestige,” said economist Jack Kyser of the Economic Development Corp. in a 1996 Los Angeles Times story.

Today, Aames is heading back to the Mid-Wilshire district.

While officials declined to comment, real estate sources familiar with the situation said the company has already vacated 53,000 square feet of its 185,000-square-foot downtown headquarters, and is searching for a tenant willing to lease the remaining space.

Once that sublease tenant is found, Aames will relocate the rest of its downtown workforce back to the Wilshire Colonnade building at 3701 Wilshire Blvd.

The company’s own financial problems and not any apparent displeasure with downtown are said to be behind the move. Still, it points up the one-step-forward, two-steps-backward nature of downtown real estate.

“It did not seem to me that Two California Plaza was the ideal space for Aames, and the fact that they are leaving now after just two years means that they agree,” said Steve Bay, senior vice president and downtown branch manager for Julien J. Studley Inc.

It also points up a little-discussed aspect of the downtown market: subleasing.

Brokers consider an excess of sublease space to be a problem because it typically depresses rents for the entire area. Because tenants with lease commitments need to find sublease tenants quickly, they are often willing to accept below-market rates for their space. And if tenants can get such great deals, why should they pay a premium for direct-lease space?

“It’s the millstone around our neck, the anchor on our boat. It’s completely uneconomic,” said Steve Marcussen, senior vice president at Cushman Realty Corp.

The annual rate for sublease space downtown ranges from $15 to $18 per square foot, a considerable discount from the $24 to $28 for the best direct-lease space downtown.

“They’re trying to get rid of it, so they sublease it to any warm body with a financial statement. It doesn’t matter what the rent is,” Marcussen said. “It’s been a tremendous problem.”

The vacancy rate in downtown Los Angeles is usually cited at 18 percent. But if sublease space is added in, the rate rises to 21.8 percent, according to Cushman Realty. That translates to 1.2 million square feet of available sublease space downtown, or 3.8 percent of downtown’s total inventory.

While landlords may not like the competition, it’s great for some tenants, who can sublease top-tier space for 25 percent to 30 percent less than they would have to pay for comparable direct-lease space.

John Barganski, director of agency leasing at Cushman & Wakefield, said he doesn’t believe the sublease market has had a significant impact on downtown rental economics.

“Most sublease space is in smaller pieces or is available for a shorter term,” he said. “Sublease space has primarily been filled by smaller tenants taking advantage of discounted rates.”

The sublease space being offered by Aames, however, does not fit that description.