Office Vacancies Decline in L.A. County

Some Los Angeles County landlords breathed a little easier in the fourth quarter as office vacancies dwindled -- setting the stage for possible rent increases this year.

The overall office vacancy rate fell to 17.4% from 18.8% in the same period a year before, according to a report by real estate brokerage Cushman & Wakefield. The average monthly rent was flat at $2.32 a square foot.

What’s more, the county showed a net gain of 314,327 square feet of occupied space for the year, compared with a net loss of 832,803 square feet in 2002.

“We’re trending up, and we’re going to trend up through this year,” said Joseph Vargas, a senior managing director at Cushman. He predicted that rents would rise modestly in the second half of 2004 as space gets harder to find.

Although office vacancies in the county have been gradually declining for more than a year, it’s still a tenant’s market. Landlords, Vargas said, are more concerned with filling empty offices than with ratcheting up rents.

Nowhere are landlords under more pressure than in the South Bay, the only market that showed a net loss of tenants for the year. The 2003 loss -- 489,475 square feet -- was even worse than that of 2002 -- 369,148 square feet. Most of that loss was in El Segundo, the Los Angeles International Airport area and along 190th Street.

The South Bay often has been a second choice for tenants looking for space on the Westside, and it took a series of hits during the last several years from cutbacks in the defense and aerospace industries and the dot-com implosion.

The Westside also took a beating after the collapse of many Internet start-up companies and the recession that followed, but its vacancy rate fell in the fourth quarter to 17.3%, compared with almost 20% in the same period a year before. Average rent ticked down from $2.84 to $2.80 a square foot.

The number of prospective tenants looking at space to rent picked up sharply in the fourth quarter, said Victor Coleman, president of Arden Realty, the region’s largest office landlord.

“The marketplace is much more positive,” he said.

That confidence is reflected by a substantial reduction in the number of tenants that are falling behind in rent or having problems with their credit, Coleman said. “Bankruptcies and defaults have dropped substantially.” Space should fill quickly if the economy achieves a substantial recovery, Coleman said, because few new buildings are in the pipeline to offer more competition. Developers and lenders who suffered when the overbuilt real estate market collapsed in the early 1990s have been reluctant to start projects until the demand for them is clear.

One developer who isn’t going to wait much longer is Jaime Sohacheski of Crown Realty, which plans to start construction by March on a $17.5-million, 100,000-square-foot speculative office building in Crown’s Wateridge office park near the east end of the Marina Freeway at La Cienega Boulevard and Slauson Avenue.

“We have requests from tenants who want to expand, and requests from brokers” for office space, Sohacheski said. “We are anticipating growth.”

He said he hoped to have tenants lined up when the building was completed early next year. Wateridge has a wide range of tenants, whose businesses include aerospace, health care and professional services, he said, with most space recently taken by technology and entertainment companies.

In downtown L.A., the county’s next-largest market after the Westside, vacancies dipped slightly to 18.9% in the fourth quarter from 19.6% a year before. Average rents rose to $2.25 from $2.13.

Rents will go up more in 2004 as space is absorbed, predicted landlord and developer Robert Maguire, chairman of Maguire Properties. The Los Angeles real estate investment trust owns some of downtown’s best-known properties, including U.S. Bank Tower (formerly Library Tower) and Wells Fargo Center.

“There is a lot of expansion,” Maguire said. “Tenants basically are feeling good about their businesses. We are seeing that pretty much across the board.”

Maguire Properties raised $225 million by selling 9 million shares of preferred stock last week, 50% more than planned. Maguire said that infusion would be used to buy and improve more properties.

The so-called Tri-Cities market of Burbank, Glendale and Pasadena continued to show a lot of leasing activity. Overall vacancies dropped to 14.5% in the fourth quarter from 18.6%, and average rent fell 3 cents to $2.36.

In the San Fernando Valley, vacancies fell to 13.7% from 16.5%, and rents rose 2 cents to $2.32. Central county office markets such as Hollywood, Mid-Wilshire and Alhambra saw vacancies dip 1 percentage point to 18.1%, and the average rent came down noticeably, to $1.73 from $2.

The tightest individual market of substantial size was the Burbank Media District, where the vacancy rate hit 4.1% in the fourth quarter at rents of $2.82, a tremendous drop from 19.1% a year before, when rents averaged $2.76. San Pedro’s tiny office market recorded a 1.1% vacancy rate, down from 2% a year before. Rents were flat at $1.65.

The worst performer was the area around LAX, where vacancies rose to 30.2% in the fourth quarter from 25.4% a year before. Rents were $1.49, down from $1.53 a year before.