Los Angeles vacancies give entertainment firms the edge in leasing negotiations By Michelle Hofmann This year, Mark Robinson plans to make a killing for his clients --- not in stocks but in commercial office space. With the slow business market, stagnant job growth, sagging occupancy rates and lack of demand for once hot creative space, Robinson, a Realtor with Julien J. Studley, a national commercial real estate firm, says entertainment firms looking to expand, renegotiate or relocate have the upper hand. "Last year, landlords really tried to hold the line on rents. Then, at the first of the year, the floodgates opened," says Robinson. Case in point: Santa Monica. According to Grubb & Ellis, monthly rents in the market hit $ 3.26 per square foot at the end of 1999. They are currently about $ 2.80. Real estate services giant Cushman & Wakefield says the office vacancy rate for Los Angeles County reached 18% during the first quarter of 2003, and 18.1% for the Westside. By comparison, regional vacancies were reportedly 12% in 2000; while Westside vacancies were about 6% for the same period. Neil Resnick, senior vice president of tenant advisory services in the entertainment division of Grubb & Ellis real estate services, says there are no great indicators that landlords have seen the bottom of the office-leasing doldrums. "Two or three years ago, firms that cater to a younger employee base were looking for warehouse conversions, with high ceilings, polished concrete floors (and) red brick walls. Then, you couldn't get into this kind of space," says Resnick. "Now, it's just gathering dust." As a result, landlords, who once commanded top dollar and fielded multiple offers have started to wheel and deal, offering free rent, reduced rental rates, generous tenant improvement allowances, flexible and short-term lease periods, and extended leases, and renegotiating deals to retain clients long before the lease expires. In addition to contractual leverage, Resnick says the drive to fill vacancies is providing tenants with newfound access to premium space in desirable submarkets like Santa Monica, Beverly Hills and new developments. "In prior years, tenants that were economically driven would be forced to look in areas that were more economical like Hollywood, Miracle Mile and the Park Mile district of Wilshire Boulevard. But because there are so many opportunities, tenants have not had to limit their searches." The market also gives tenants the option to move to more cost-effective office space, or examine their present real estate obligations and renegotiate contracts, Robinson notes. "I might be able to go to a landlord and say, 'We'll extend the lease, if we renegotiate. I want to restructure the two years I have left and get a better rental rate. (So) I have significant savings over (the) next 24 months, but you have a great cash flow that you can borrow against.' " Even with large concessions, many landlords face additional competition from tenants who sublease space to other firms at a fraction of the cost of direct leasing. The average rate for direct and sublet space in Los Angeles County was around $ 2.16 in the third quarter of 2002, according to Travers Realty/ONCOR Intl., a tenant representation firm. But some sublease situations with relatively limited time left on them are available for $ 1 to $ 1.25 per square foot, Resnick says, which compares with some public storage facility rates. So deals abound, but how long do showbizzers have before the window of opportunity closes? "It's not a window ... it's a loading-dock door," says Robinson. "And I'm not sure it's going to close." He could he right. Cushman & Wakefield says 1.3 million square feet of new construction expected to be completed in Los Angeles County this year is only about 49% preleased and could potentially push vacancy rates back up. But Raphael Bostic, director of the USC Lusk Center's Casden Real Estate Economics Forecast, expects the demand for office space to increase by the end of 2003, and the regional market to recover fully by next summer. In the meantime, Robinson says, "Any tenant with two to three years left on an existing lease that is not exploring options is being negligent."
June 20, 2003