DOWNTOWN LOS ANGELES - As the economy continues to slump, business owners and consumers are always on the lookout for indicators that the worst is over. Those searching for bright spots shouldn’t focus on the Downtown Los Angeles office market.
Vacancy in Downtown high-rises inched up to 14.6% in the third quarter, compared to 13.1% during the same period in 2008, according to the 2009 Casden Forecast Industrial and Office Report, recently released by the USC Lusk Center for Real Estate. Expectations for the future are dark.
The study of regional office and industrial markets also indicated a slight drop in average rents Downtown, from $3.23 in the third quarter of 2008 to $3.22 this year. Rents in Class B buildings fell 9%.
“I think the next two years are going to be very tough for the office market,” said Richard Green, director of the Lusk Center and a co-author of the study. “Downtown L.A. is doing a little better than other sub-regions but it’s not immune. You have things like law firms laying people off, so when their lease rolls over they’ll need less space.”
The overall economy has shown signs that the recession may be easing, namely U.S. Labor Department data that the national unemployment rate dropped in November, from 10.2% to 10%. But that doesn’t hint at an imminent turnaround in office markets, which are considered lagging indicators, Green said.
“It’s the economy, then jobs, then office, in that order,” Green said. “We’ll have to see whether that [unemployment news] sticks, but it’s not until jobs start growing — it’ll be six months after that before the office market picks back up.”
In Downtown in the third quarter, a net total of 94,000 square feet of space came on the market. Year-to-date, 319,000 square feet of office space has gone vacant, according to the USC report. As of the third quarter, there was more than 4.7 million square feet of available space.
Despite the struggles, brokers, property owners and academics rate Downtown favorably among other regional markets. Its $3.23-per-square-foot average asking rent is second only to West Los Angeles, where Class A rates are $3.81 per square foot.
The neighboring Mid-Wilshire area has been especially hard hit, losing 364,000 square feet of space this year. Its vacancy rate has soared from 9.4% in the third quarter last year to the current 14.2%.
The Tri-Cities area, comprised of Pasadena, Glendale and Burbank, saw the largest leap in vacancy, from 10% in the third quarter of last year to more than 17% this year.
The USC report attributes the losses in most regional markets largely to the departure and downsizing of financial services firms. Downtown has in part weathered the storm by virtue of a tenant mix dominated by law firms, accounting firms and management consultants.
“When you have business failures, that’s problematic,” said Bert Dezzutti, senior vice president and regional head of property owner Brookfield Properties’ Southern California operations. “Downtown has largely avoided that. We’ve come through the cycle so far in pretty good shape without major reductions. Tenant improvement allotments haven’t gone through the roof. Tenants may look at their space needs more efficiently, but they’re not going away.”
According to the USC report, tenants are indeed downsizing. They are also taking advantage of dwindling demand for space by negotiating for favorable lease terms when contracts expire, Green said.
Brookfield Properties signed a major deal last week, renewing a lease with Ernst & Young at its namesake Ernst & Young Plaza at 725 S. Figueroa St. The accounting firm signed a 12-year deal to keep its 121,000 square feet of space (the company occupies six floors in the 41-story tower).
Large property owners such as Brookfield tend to be built to ride out tumultuous cycles in the economy. But higher office vacancy can be more immediately felt on the ground level, by retailers who cater to the suits who work upstairs. Derrick Moore, vice president of brokerage services at real estate firm CB Richard Ellis, said some of his retail clients are hitting hard times.
“They attribute this to the fact that there are fewer people present, and then people seem a little bit more conservative as to what they’re spending,” said Moore.
Jack Kyser, senior vice president and chief economist of the Los Angeles County Economic Development Corporation, seconded Green’s prediction that the office market will not see any meaningful gains in 2010.
“The unpleasant thing is most people feel that just the overall office market in L.A. County is not going to do much in the next couple of years because you’ve got lenders who aren’t making any money available and a lot of these people are holding real estate loans that are under water,” Kyser said.
But Downtown property owners can take solace in the future: The community will get a shot in the arm when the Convention Center hotel opens in February, and will continue to lure office tenants away from the Westside, Kyser said.
“Down the road people are going to say, ‘I can get a lease here cheaper than the Westside,’” he said. “And they have better transit access and it’s a fun place with a lot of things to do.”
Contact Ryan Vaillancourt at firstname.lastname@example.org.
page 5, 12/21/2009
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