Banking layoffs slow recovery of commercial property market.

The ongoing banking industry consolidation will continue to hamper the nascent recovery of L.A.'s commercial real estate market, according to real estate professionals who serve the banking industry.

But future mergers aren't likely to have as negative an impact on local real estate markets as the big combinations that have already taken place.

While there's bound to be some fallout from future acquisition activity - and there will undoubtedly be more mergers, banking experts predict - their impact in L.A. won't be as severe primarily for two reasons.

First, L.A.'s two former commercial banking giants - Security Pacific Bank and First Interstate Bank - have already been swallowed up. There simply aren't any banks left in L.A. that occupy anywhere near as much commercial space as those two institutions once did.

Second, recovery is under way within most of L.A.'s primary commercial real estate markets - although downtown is still struggling with soft demand for highrise office space.

Hence, a big merger affecting a major L.A.-area institution would not be as likely to involve a huge exodus, such as the one that came with the BofA/Security Pacific merger in particular.

Even downtown, "the fact that most of the major consolidations have taken place means there simply aren't as many bodies in the banking business," said R. Todd Doney, a vice president with Cushman Realty Corp.

Relative to the BofA/Security Pacific and Wells/First Interstate mergers that hit L.A. during the last five years, other combinations would be "minor blips on the radar screen," Doney said.

Beyond downtown, some of L.A.'s sub-urban office markets are feeling the effects of big thrift mergers - and will likely continue to feel them depending on which institutions end up in the months ahead.

L.A.'s Miracle Mile district recently saw First Nationwide Bank put more than 100,000 square feet of former California Federal Bank headquarters offices up for sublease after First Nationwide bought Cal Fed.

And Great Western Bank's approximately 900,000-square-foot headquarters campus is certain to be at least partially emptied whether Seattle-based Washington Mutual Inc., Irwindale-based H.F. Ahmanson & Co. or some other institution ends up owning Chatsworth-based Great Western.

But the suburban markets aren't likely to get hit anywhere near as hard as downtown got hit by the commercial bank mega-mergers.

The BofA/Security Pacific dumped more than 600,000 square feet of office space on the downtown market - much of it prime Bunker Hill highrise space. Much of the space hit the market at the depth of a severe recession.

"That's close to a year's typical 'net absorption' on Bunker Hill, downtown's premier (highrise) marketplace, so that extended the gray cloud for an even longer period of time," said Steve Bay, branch manager of brokerage Julien J. Studley Inc,'s downtown L.A. office.

(Net absorption refers to the rise or fall in the total amount of space occupied in a given market area over a specific time period.)

The mega-merger of Wells Fargo Bank and First Interstate is likewise dumping a substantial amount of space on the downtown market, but "probably won't have quite as much impact" as the BofA/Security Pacific deal, Bay predicted.

That's because much the space Wells Fargo is putting on the market isn't prime office space - with the exception of the former First Interstate executive offices at First Interstate World Center on Fifth Street.

The biggest chunk of space Wells has on the market is a back-office facility, located west of the Harbor (110) Freeway, that is not designed for multi-tenant general office use.

In addition to flooding the market with highrise administrative office space, financial institution mergers have also flooded Southern California with surplus retail bank branches.

But there appears to be stronger demand for those facilities than for general office space, said Marc Renard, director of financial services at realty company Cushman & Wakefield Inc.

"The locational attributes of these properties are being received favorably by a variety of potential users and owners; they're being absorbed quickly unless they're subject to ground leases (i.e., they're not owned outright by the financial institution) or they're in funky locations," said Renard, who works with large financial institutions.

Smaller foreign banks, retailers, professional service firms and restaurants are picking up the branch properties, which are "usually in good locations with parking and access," Renard added.

Such users will most likely continue to be active buyers as future mergers create even more surplus branches, and retailers look to expand as the local economy gains steam. "I expect more of the same as (overall) retail sales continue picking up," he said.

And more of the same merger activity is bound to cause distress within local office markets - even if it's not as dramatic as downtown saw with the two big commercial bank mergers.

"It's scary to think about it, but there can be gigantic differences in (downsizing strategies) depending on whether two California institutions merge or we get an out-of-state buyer" taking over a local institution," said Howard Sadowsky, executive vice president with Studley.

An out-of-state partnership would presumably result in fewer branch consolidations, analysts point out.

Whether the buyers are California institutions or from elsewhere, consolidations are inevitable, as technology allows already healthy banks to keep getting leaner and meaner while still profitably serving their customers, Sadowsky said.

"We're seeing mergers on all levels money center banks, regional institutions, savings banks," agreed Studley's Bay.

For instance, Washington Mutual, an aggressive buyer in recent months, could end up acquiring other California institutions after swallowing up Great Western a deal both of those thrifts have agreed to.

The flurry of consolidation seems to make institutions such as downtown L.A.based Coast Savings Bank and H.F. Ahmanson prime targets, industry sources said.