Aerospace cutbacks add to office space on the South Bay market.

Aerospace cutbacks add to office space on the South Bay market

Aerospace industry personnel cuts in the South Bay area have created a new and growing market for companies looking for commercial office space in Los Angeles County, real estate experts said.

Companies that otherwise may have looked in Los Angeles proper are turning to South Bay communities like El Segundo and Long Beach, they said. Attractive lease prices there are available because of the growing amount of vacant office space once occupied by large aerospace and defense industry companies, real estate experts said.

Because of the oversupply of office space, new industries are moving into the South Bay, diversifying the area's economy, which for years has been largely linked to big aerospace and defense companies like Rockwell International Corp., Hughes Aircraft Co. and Douglas Aircraft Co., they said.

In addition, the attractive sublease prices are creating problems for office building developers who are unable to match the deals without suffering losses, representatives from South Bay commercial real estate companies said.

They said the abandoned office space has been a major factor in the depressed office real estate business in the region that has created a strong tenants' market. However, because of the attractive sublease prices, the South Bay commercial real estate market is not as depressed as other areas of the county, they said.

"There are definitely some deals available and that has created some problems for developers, but in the longer term it is creating a multiple market rather than just defense market," said Robert Peddicord, assistant director of Julien J. Studley Inc., a commercial real estate company.

In the last two years, Douglas and Hughes in particular have cut thousands of workers from their payrolls because of declining defense spending. At Hughes, for instance, employment in El Segundo has dropped to about 23,000 from a peak of 29,000 in the mid to late 1980s.

At Douglas in Long Beach, employment has fallen to about 35,000 from more than 40,000.

Rockwell laid off workers and abandoned some property in the late 1980s when it completed its B-1B project. That space has been leased but later this year Rockwell will be moving its corporate headquarters out of El Segundo to nearby Seal Beach in Orange County, vacating about 100,000 square feet of offices.

Hughes' spokesman Bill Herrman said the company's three divisions in El Segundo - space and communications, radar systems and electro-optical and data systems - has reduced space to 5.6 million square feet from 6.6 million two years ago.

"We may have some more employment cutbacks but we don't anticipate any major reductions this year. We still have some excess office space that we will attempt to divest though, because we certainly don't want to carry any space that we don't need," Herrman said.

He said so far carrying the empty space has not put a financial strain on Hughes, which companywide employs about 68,000 people who produce high-technology military and space equipment like radar, communications and training systems.

Estimates of office vacancy in El Segundo range from a low of 10 percent to almost 30 percent, but most industry experts said vacancy is probably around 12 percent or 13 percent. Countywide, the vacancy rate is about 15 percent, said a current report on the real estate market by Grubb & Ellis Co.

Real estate experts in the South Bay said the aerospace companies are subleasing space for between $1.25 and $1.75 a square foot as opposed to direct leases by other developers of between $1.75 and $2.10 a square foot.

"Hughes is putting very little into tenant improvements, maybe $10 a square foot while the typical landlord will have to spend $20 to $30," said John Ayoob, first vice president at Coldwell Banker's commercial real estate office in the South Bay.

Real estate experts said most of the office space vacated by the aerospace companies in the South Bay is in modern, good-quality buildings constructed between 1980 and 1985 on such main thoroughfares as Sepulveda Boulevard and Imperial Highway.

In most cases, the aerospace companies were the only tenants in the buildings.

Real estate company representatives said the vacated office buildings are being subleased by several tenants rather than single companies.

"There aren't any big companies coming in and taking 250,000 to 300,000 square feet or more at a time like the big aerospace companies. There are more tenants that are taking 35,000 or 40,000 square feet," said Peddicord.

Among the smaller tenants to move into buildings vacated by Hughes in El Segundo are a hospital that relocated some administrative operations, a computer company and a city engineering department.

"All kinds of industries have picked up the slack and moved into the area, airlines, high-tech companies and toy manufacturers," said Ayoob. "Because of the pricing and the deals that are available, it (El Segundo and the South Bay) has become an alternative to West Los Angeles."

Real estate experts said the vacated offices are forcing agents to become more aggressive in selling the space because the properties are being leased floor by floor rather than building by building.

"It's going to take more time to lease the space but I think it will be better for real estate and for the area's economy because it will be less dependent on defense," said Peddicord.

The industry representatives said they do not expect too much more space to become available but some defense- and aerospace-industry officials expect layoffs to continue for at least another year.