Pricey Office Leases Spread Sticker Shock on Westside

Business owners in Los Angeles’ popular Westside are being forced to decide just how much an address is worth. Office landlords, who endured a depressed real estate market for most of the 1990s, are raising their rents--even doubling them.

“It’s sticker shock,” said Vince Pellerito, a Cushman Realty Corp. broker. “A lot of tenants are in for a big surprise.”

Tenants are being jolted by the steep rent hikes owners are demanding in what has turned from a market that clearly favored tenants a few years ago to conditions that clearly favor landlords today.

“A lot of tenants in West Los Angeles took advantage of the market when it was at the bottom in 1992 and 1993,” Pellerito said. “Leases are coming due, and in many cases the rent is 50% to 100% more than what they’re currently paying.”

Landlords have been raising rents for some time now, Pellerito said. But many business owners and operators, who generally don’t pay attention to rates on a day-to-day basis, aren’t aware how much the market has changed. The sticker shock phenomenon is gaining momentum lately because a substantial portion of office tenants sign five-year leases, meaning many whose leases are now coming up for renewal moved into their space when rents were at or near the bottom, he said.

When the market was weakest, landlords sometimes leased space for as little as $1.50 per square foot per month in some of the Westside’s prime business neighborhoods such as Santa Monica and Century City--barely enough to cover their expenses, Pellerito said.

Now, understandably, landlords want to boost rates to make a profit.

While rents have been rising steadily in almost all Los Angeles County office markets during the economic recovery, hikes have been steepest in West Los Angeles, a market of nearly 44 million square feet of office space that is composed of at least nine smaller markets.

Asking rents range from about $1.50 per square foot per month in the Hollywood/West Hollywood market to more than $3 per square foot per month in Century City, according to a Grubb & Ellis Co. survey. Brokers say the priciest buildings there command even higher rates--beyond $4 for some suites.

“Some of the best examples of sticker shock are probably in some of the premier buildings in Century City, like Fox Plaza and the Sun America Center,” said Jim Travers of Travers Realty Corp.

Some brokers say sticker shock is driving tenants out of expensive space and into more economical digs, while others say they still see a flow of companies from less expensive markets into more prestigious Westside offices.

“There are a lot of people who moved into A-quality buildings when the rents were lower, and now that the owners are going to $2.50 or $3 and more in those buildings, the tenants are looking at moving back into B or C buildings,” said David Lachoff, a Grubb & Ellis broker. Lachoff said the migration to B and C buildings has made those locations lucrative investments for their owners.

But Lawson Martin, a Travers Realty broker, said he sees at least as much flow of tenants from other markets into the most popular Westside buildings.

“There are plenty of companies that don’t mind paying $3 or more per square foot. We’re seeing more of a trend of people moving out of the lower-priced markets and into the higher-priced markets because their businesses are doing well and they can afford the higher rents,” Martin said.

Some businesses insist on being in Century City or Santa Monica and won’t move even a few miles to a market such as Marina del Rey to save money, he said.

On the other hand, there are plenty of tenants who are sensitive to price. Stan Gerlach, a CB Richard Ellis broker, cited a law firm that is moving from West Los Angeles to Brentwood, and saving money in the process, because the partners didn’t want to pay the $3.50 per square foot the landlord was asking on renewal. The firm’s rent will be roughly $2.50 per square foot in Brentwood--a sign that sub-$3 rents can still be found in good business neighborhoods on the Westside, Gerlach noted.

“I wouldn’t say the trend is widespread, but there are companies that are moving for the low-priced alternative. In general, Gerlach and other brokers said, partnerships like law and accounting firms, or other businesses in which the rent comes out of the owners’ pockets, are more likely to move if the rent gets too rich for their blood.

However, some companies won’t budge, even if it could save them considerable cash. Travers said entertainment firms, in particular, won’t consider moving to downtown Los Angeles.

“Downtown rental rates have increased, but it still has some of the finest, world-class buildings at very reasonable rates with plenty of space available, but some tenants just want to stay on the Westside and that’s that,” Travers said.

According to Pellerito, sticker shock can present problems for local offices of Eastern companies when the L.A. executives tell their headquarters how much the rent is likely to rise. He said the response from Eastern executives is often, ‘Can’t you go someplace else for what you’re currently paying?’ ”

If the tenant is now paying one of the rock-bottom rents of the mid-1990s, such as $1.50 per square foot, the answer would probably be the Los Angeles airport area or Mid-Wilshire. Both are highly unlikely destinations for most Westside businesses.

“It isn’t just a bottom-line decision. Companies care a lot about qualitative issues,” Pellerito said. “For one thing, the economy is good, so they’re not as sensitive to rent spikes as they might otherwise be. And with the labor market as tight as it is right now, companies feel they need to offer an environment that attracts top-quality employees.”

Staying on the Westside, however, doesn’t always have to mean paying top dollar, brokers say.

“The alternatives aren’t as abundant as they were five years ago, but there is still plenty of space around on the Westside,” Travers said. “Buildings don’t have four or five floors available anymore, and you have to act faster to get the space you want, but there are still deals out there.”

Travers advised that a good way to avoid sticker shock is to start renegotiating long before the lease is due for renewal. He cited a tenant in Century City’s twin towers that saved more than $3 million by signing a long-term lease for $2.15 per square foot two years ago, long before the tenant’s lease was up. Comparable space there is now going for considerably higher rates, he said.

Despite steadily rising rents on the Westside, Pellerito believes tenants may be in for a break. He expects rates to level off later this year, in part because several hundred thousand square feet will probably become available at 1900 and 1901 Avenue of the Stars in Century City. The space has remained empty pending the sale of the buildings by Shuwa Investments Corp. as part of the divestiture of its office portfolio, he said.

Another leveling factor, Pellerito said, will be the 925,000 square feet of office space being built in Santa Monica, much of it scheduled for completion by the end of the year. That should bring supply and demand into closer balance.

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Westside landlords are raising their rents as office space continues to contract in the Los Angeles region’s most desirable market. Vacancy rates have fallen below 10% in nearly all of the Westside office sub-markets shown below. Tenants who signed leases at or near the bottom of the recession in the early to mid-1990s are sometimes finding their rents doubled as the leases expire.

Westwood: 5.91%

Pacific Palisades / Malibu: 5.93%

Olympic Corridor: 6.01%

Marina del Rey / Venice: 6.45%

Brentwood: 7.34%

Century City: 7.37%

West Los Angeles: 7.50%

Santa Monica: 7.61%

Beverly Hills: 8.22%

Culver City: 10.01%

Source: CoStar