Aerospace cutbacks continue to hammer South Bay; vacancy hits 28% when sublease space is figured in.

The aerospace contraction has depressed the South Bay office market to the point where rents are at or below 1979 levels. Despite those bargain rents, more South Bay office space was vacated than leased in 1992, said area brokers.

Monthly office rental rates in the South Bay market, defined as the area from Los Angeles International Airport to the Port of Los Angeles and inland to the San Diego (405) Freeway, now range from $1.50 to $1.65 a square foot for class A space -- the best space on the market -- to about $1 for class C space, said Stephen Cramer, vice president of The Seeley Co., a commercial brokerage firm. In 1989, at the top of the market, he said, the South Bay class A rents were $1.70 to $1.85 a foot.

Cramer said 1992 was one of the worst years for the South Bay commercial market because it suffered substantial "negative net absorption," which means the amount of space vacated in that period exceeded the amount of space leased. For The South Bay office market, excluding Long Beach, had negative net absorption in 1992 of 171,000 square feet, reports Cramer. That compares to a positive net absorption of 440,000 square feet in 1991.

Cramer attributes the growing glut of space on the market to the exodus and consolidation of aerospace companies in the area.

With record low rents, many more companies can now afford class A space, leaving the South Bay littered with vacated older buildings, similar to what has been happening in downtown L.A. in recent years.

The LAX/Century Boulevard submarket, which contains some of the oldest office buildings in the South Bay, also has the market's highest vacancy rate: 36 percent, according to national brokerage firm Grubb & Ellis co.

Brokers said less than one-third of the office buildings in the LAX area are class A.

On the upside, the LAX/Century Boulevard submarket offers some of the lowest rents in the South Bay, according to area brokers.

Yet the overall office vacancy rate for the South Bay -- which includes the LAX area and the cities of El Segundo, Manhattan Beach, Torrance and Carson -- stood at 21 percent at the end of 1992, according to year-end data from Grubb & Ellis. The vacancy rate for class A space was a bit more respectable -- 18 percent.

But if sublease space is figured in, the market's vacancy rate shoots up to 28 percent. In addition to the 4.6 million square feet of direct-lease space available in the South Bay at year-end, there is nearly 1.5 million square feet of sublease space available.

The Hughes Aircraft Co. headquarters facility on Lincoln and Jefferson boulevards in Marina del Rey accounts for 500,000 square feet of sublease space and the Hewlett-Packard training facility in Westchester accounts for 165,000 square feet of sublease space.

Cramer said there's probably another 700,000 square feet of sublease space not even being marketed because rents are too low.

Like most markets, the South Bay has seen its commercial office development come to a standstill. Cramer said only one new building was completed in 1992: Continental Park Terrace on Rosecrans Avenue in El Segundo. That 189,000-square-foot class A office building opened without a precomittment from a major tenant on Dec. 11 and is now 33 percent leased, said a spokesman for El Segundo-based Continental Development, the developer of the project. He said another 20 percent of the building's space is currently in lease negotiations.

Cramer said the only positive South Bay events last year were expansions of some companies in El Segundo and Torrance.

He said there was "little actual leasing volume" in the South Bay and called 1992 "a year of real estate indecision."

The handful of office deals that occurred in the late third quarter and fourth quarter of 1992 included the following:

* Western Waste Industries purchased an office complex of three buildings totaling 150,000 square feet. The three-story class B buildings, called Torrance Pacific Plaza when they were originally built in 1984, were renamed the Western Torrance Plaza. Cramer said Western Waste moved into 60,000 square feet of space that was vacant, which moved the complex's occupancy rate to 85 percent.

* The City of Los Angeles Hyperion Engineering Group leased 38,000 square feet of space in Continental Grand Plaza, a five-story, 240,000-square-foot building in El Segundo. That class A building, built in 1986, has a marble entryway and is considered one of the nicest buildings in El Segundo, said Cramer.

* Seiko Corp. of America, as of early January, was in lease negotiations for 27,000 square feet of space in the 840 Apollo Building in El Segundo, which was vacated by TRW. Seiko plans to open a watch repair and sales office there.

* Maritz Travel leased 43,000 square feet of space in the South Bay Center, an 8-year-old midrise at 1515 190th St. in West Los Angeles, just east of the Torrance city limits. Maritz was already leasing space in the building, said Cramer. But it renewed its pre-existing space and leased an additional 14,000 square feet after looking around the market.

Brokers said they haven't heard of any deals besides Seiko in the pipeline, which could be an ominous sign for 1993. Once a deal is "on the street" it takes about four to five months to complete, brokers said.

On positive side, brokers said, continuing aerospace layoffs are forcing the South Bay to diversify its tenant mix, which, if successful, will protect the market from another industry trauma.

Still, brokers do not think the South Bay market has hit bottom yet. More layoffs are expected at aerospace companies. Grubb & Ellis is predicting the vacancy rate will rise at least two percentage points and that the negative net absorption will increase slightly in 1993.

Major companies expected to give up South Bay space in the next year include Rockwell International Corp., TRW Space & Defense Sector, Mattel Inc., Hughes Aircraft Co. and EDS International, said Bruce Schuman, vice president of The Seeley Co.

"In my opinion this has been one of the worst markets for a long time," he said. "The biggest problem is that the South Bay was an aerospace community and now that's changed."

Aerospace employment in L.A. County is estimated to have dropped from 300,000 in 1990 to about 200,000 today.

A year ago, Hughes had 63,000 employees. By June, Hughes had cut 3,000 employees and announced 9,000 additional layoffs would take place over the next two years.

The company, which owns at least 50 buildings in El Segundo, according to brokers, also announced it is moving the Canoga Park headquarters of its missile systems division to Arizona. But whether the company is entirely pulling out of Southern California is unknown.

Between TRW and Hughes, about 1 million square feet of office space has been put on the market in the last 12 months to 18 months, said Paul Brunsell, managing partner at Lee & Associates Commercial Real Estate.

Brokers are predicting bargain rental rates will persist in the South Bay throughout 1993.

With more office buildings expected to be foreclosed on in 1993, office sales prices and rental rates are expected to fall even further.