Article by Danny King
Staff Reporter
Are we there yet? For weeks, landlords and brokers alike have been waiting for concrete signs that Los Angeles County’s commercial real estate market has hit bottom. Many were convinced that the aftershocks of Sept. 11, coupled with a real estate market that began softening towards the end of 2000, would finally be shaken off during the first quarter of 2002.
Think again.
The county’s office market saw its fifth consecutive quarter of negative absorption due to general inactivity and the continued hesitancy of tenants to expand or move.
Landlords put about 706,000 square feet of direct lease space back on the market during the first quarter, compared with 818,000 square feet in the fourth quarter of 2001, according to Grubb & Ellis Co. The countywide office vacancy rate was 15.9 percent during the first quarter, up from 15 percent in the previous three months and 12.9 percent for the like period a year ago.
“Tenants would rather stay where they are, even if it means paying more rent, rather than face the uncertainty of moving,” said David Lachoff, senior vice president at Grubb & Ellis Co.
The deals that did occur were more likely to involve either a renewal or retrenchment than an expansion. So for every Countrywide Credit Industries looking for an additional 150,000 square feet in the San Gabriel Valley, there was Walt Disney Co. consolidating its ABC Family Channel subsidiary and bringing 300,000 square feet of sublease space to the Westwood market.
Opinions are mixed on whether the near-term future looks bright or dim.
“We’re hoping for a modest increase in economic activity,” said Stuart Gabriel, Director at the USC Lusk Center for Real Estate. “We’re not looking at a “V” or a sharp improvement, but we’re looking at a positive rate of economic growth.”
“Have we hit bottom? Probably not,” said Steve Kolsky, principal at Newmark & Co. “The rate that space has been put back on the market has considerably slowed but the activity levels have not picked up significantly this year. You’re not seeing as many new tenants in the market.”
More clear than the near-term outlook is the delineation between what markets performed well and what markets didn’t. The only two markets that experienced positive absorption for the quarter were downtown Los Angeles and Wilshire Center.
By absorbing over 149,000 square feet of space – the most in the region – downtown reduced its vacancy rate to 17.3 percent in the first quarter from 17.8 percent in the October-December period. The vacancy drop at Wilshire Center, which is less than a quarter the size of the downtown market, was more pronounced – 13.4 percent in the first quarter from 15.1 percent in the fourth.
“I think that has a lot to do with the diversity of our market and the lack of reliance on one or two industries,” said Joe Faulkner, executive vice president at Grubb & Ellis Co.
West Los Angeles continued its dot-com-related hangover, accounting for the largest amount of negative absorption of the county’s markets. But, as part of a trend typified by law firm Alschuler Grossman Stein & Kahan’s move into 85,000 square feet at the Water Garden from Century Plaza Towers, Santa Monica absorbed 92,000 square feet. Century City put 283,000 square feet back on the market, the most of any subregion in the county.
The decline in activity was felt consistently throughout the county, though. The South Bay, which should get a shot in the arm as Northrop Grumman Corp. is expected to sign a 300,000-square-foot lease in El Segundo, and the San Gabriel Valley, which was the county’s lone bright spot during the fourth quarter, each put about 100,000 square feet of office space back on the market.
“If you look at 2001, we had a lot of completions that went on the market and affected the numbers,” said Brad Cox, senior managing director at Cushman & Wakefield of California Inc. “That space is going to take a longer period to absorb than expected.”
The county’s industrial market softened for the third straight quarter, recording a 4.7 percent vacancy rate in the first quarter, up from 4.5 percent in the fourth quarter and 4.2 percent in the year-earlier quarter.
Reflecting an economy more dependent on foreign trade, industrial activity was stronger near the ports. South Bay and Mid-Cities reported market tightening while the markets of North Los Angeles and San Gabriel Valley softened slightly.
“That market is off because general economic conditions are flat and employment is down,” said Grubb & Ellis Senior Vice President Jim Biondi of the North Los Angeles market, where the vacancy rate was a county-high 7.5 percent for the quarter. “The tenants up there are more manufacturing and warehousing as opposed to your pure logistic companies in the South Bay.”
Despite having a vacancy rate that rose 0.6 percent between quarters, the Central Los Angeles market remained the county’s tightest, with a 3.2 percent vacancy rate for the quarter.