Westside/lk1st/25inches/mark2nd

By BENJAMIN COLE

Contributing Reporter

Just when you thought the Westside office market couldn’t get any hotter, along came the first quarter of 1998.

“The fourth quarter is usually the busiest of the year, while the first quarter is usually the slowest,” said Stephen Smith, president of Meridian Appraising Inc., a Century City-based property appraisal firm. “But this year, I was busier in the first quarter than I was in the fourth quarter of last year. I’ve been working 80 hours a week, seven days a week.”

The action is so ferocious that Stephens said he is tempted to compare 1998’s first quarter to the late 1980s, when real estate in Southern California went off the charts.

“We’re still one pitch below that, but if things keep going we’ll get there,” he said. “I hope we don’t reach that frenzy because business is always cyclical, but we are getting there.”

Asking lease rates for offices on the Westside are the highest in L.A. County. In such tony neighborhoods as Westwood, the average asking rate is $2.85 a square foot per month for class-A space, compared with a countywide average of just $1.67, according to Cushman & Wakefield Inc.

Other hotspots include Santa Monica, where the average asking rate was $2.56 per square foot, Century City ($2.41) and Brentwood ($2.35).

As lease rates rise, vacancy rates are plunging into the single digits, another phenomenon not seen much in this decade.

In Beverly Hills, for example, the first-quarter vacancy rate was 9.9 percent, compared with 12.6 percent in the fourth quarter of 1997, according to Cushman & Wakefield. The vacancy rate for Century City dropped to 8.4 percent, from an already low 9.0 percent in the fourth quarter.

The Westside continues to do well because the entertainment industry wants to be there along with top-flight law firms and other support services, said Vincent Pellerito, a broker with Cushman Realty Corp. in Century City.

“For many industries, the Westside is the only location they consider,” said Pellerito. “That’s where corporate executives live, and they want to live close to work.”

Pellerito noted that the Century City Plaza Towers, at 2049 Century Park East, upped its rental rates in the first quarter, the third time in the last six months.

Also, in the first quarter, Jackson National Life Insurance Co. took 32,000 square feet at 10877 Wilshire Blvd., in Santa Monica. Other companies choosing the Westside in the first quarter included Live Entertainment Inc., which signed a lease for 40,000 square feet in the old NME building in Santa Monica (at 2700 Colorado Blvd.), and recording company EMI Inc., which took 20,000 square feet in the same building, said Harry Bateman, an analyst for Grubb & Ellis Co.

Blueblood law firm Sullivan & Cromwell expanded its operations as well, taking 40,000 square feet at 1888 Century Park East in place of its downtown Los Angeles haunts.

Eye-popping deals are being hatched for premier space. For top floors in trophy buildings, or boutique space in tony surroundings, rents as high as $5 a square foot were reached in the first quarter, according to brokers.

“The top floor at the Center West building (on the corner of Glendon Avenue and Wilshire Boulevard in Westwood)) is asking $5 a square foot,” said Gary Weiss, senior managing director with brokerage Julien J. Studley & Co. in West Los Angeles.

There is a downside to the higher rents, brokers admit. Some tenants are experiencing a form of “sticker shock,” which is leading them to seek less expensive space elsewhere.

The combination of more space at higher prices is a kick in the wallet. If a company moves from 20,000 square feet at $2 a foot per month, to 30,000 square feet at $3, its monthly rent increases from $40,000 to $90,000 a jump of 125 percent. Meanwhile, in a non-inflationary environment, passing increased costs along to customers is increasingly difficult meaning rent hikes often translate into smaller profits.

“A lot of tenants have leases (expiring) in the Saban Plaza, or Century Plaza Towers, and they now are looking at Olympic Boulevard or Bundy (Drive), trying to find cheaper space,” said Weiss of Julien J. Studley.

Added Pellerito: “People are willing to pay a premium (to be on the Westside), but there are limits, and many corporate users are going to have a very difficult time justifying the rents on the Westside (to shareholders).”

Meanwhile, the chance to achieve hefty returns has encouraged Westside building owners either to upgrade their properties to class A, or to masquerade lower-quality properties as class A by slapping on a fresh coat of paint.

“You have a lot of class-B building owners now pretending to be class A, trying to charge class-A rents. But they shouldn’t do it,” said Weiss. “The tenants can tell the difference, and the landlords will just price themselves out of the market.”

But Bateman said, “If you can get a return by renovating from perceived class B to class A, then landlords will do it.”

Property appraiser Stephens, who works primarily for banks and lending institutions, noted a new kind of action in the first quarter: businesses, now profitable, are beginning to buy their own smaller office buildings.

“Now that prices are going up, people are realizing they can build up equity,’ said Stephens.