Bargain prices trigger year-end flurry of activity; MGM, Disney deals are among the quarter's biggest.

Los Angeles County's commercial real estate markets continued to display widespread softness during the fourth quarter of 1992. Although the amount of office space leased during 1992 exceeded 1991's amount -- both for the fourth quarter and the entire year -- that increased activity came as a result of rock-bottom lease rates, rather than economic growth.

As some of L.A.'s biggest office tenants continued to vacate space amid the lingering local recession, fourth-quarter deals hardly dented the overall vacancy rate despite the absence of new construction.

Quarterly highlights included the huge lease relocating Metro-Goldwyn-Mayer Inc. from Culver City to Santa Monica, and Walt Disney Co.'s acquisition of The Disney Channel building in Burbank. The disbanding of brokerage Knight Frank Faulkner Baillieu and the announced corporate-staff downsizing of Pacific Enterprises and Hughes Corp. constituted the quarter's most daunting "lowlights."

But real estate professionals were likely encouraged that the leasing market ended the year with something of a bang -- December is typically a quiet month -- with downtown activity particularly frantic.

"The fourth quarter was very busy, as people scrambled to get deals closed by year-end for tax purposes; I closed five (deals) during the third week of December alone," noted Kathryn Schloessman, a downtown office leasing specialist with CB Commercial Real Estate Group Inc.

"By the fourth quarter, 'fence-sitters' had stopped sitting," added Mike Zugsmith, principal at Zugsmith-Thind Commercial Real Estate Services. Many "small- and mid-sized" tenants waiting for rents to bottom out "made their moves in 1992, and the trend definitely accelerated during the fourth quarter," Zugsmith said. Many landlords also conceded that "rents won't rise any time soon," and accepted terms they'd been reluctant to offer in the recent past, he continued.

One positive impact of the scrambling was that Los Angeles County's fourth-quarter "net absorption" -- the amount of office space moved into minus the amount vacated -- was more than twice the amount "absorbed" in the third quarter, according to preliminary year-end figures from commercial brokerage firm Grubb & Ellis Co. While still anemic relative to the late 1980s boom years, the countywide "net absorption" of 282,000 square feet far eclipsed the third quarter's 126,000, Grubb & Ellis noted.

Positive absorption of 312,000 square feet in Central Los Angeles -- which includes downtown L.A., Pasadena, Glendale and Mid-Wilshire -- accounted for much of the county's quarterly net gain, according to G&E.

West Los Angeles, which saw net absorption of 54,000 square feet, and the San Gabriel Valley, with 10,000 square feet, experienced slightly better than "break-even" quarters. But "negative net absorption" (more move-outs than move-ins) of 45,000 square feet in the San Fernando Valley and 49,000 in the greater South Bay area offset some of the county's overall improvements.

Commercial brokerage firm Julien J. Studley Inc. reported 2.23 million feet of "gross leasing" activity in Los Angeles County's "primary office markets" during November and December. "Gross leasing" does not account for space tenants vacate, and "primary office markets" excludes Long Beach and the San Gabriel Valley.

The county's "gross leasing" figure was about the same for the same two-month period of 1991.

For 1992 as a whole, however, the county's gross leasing activity far exceeded its 1991 total -- 16.5 million square feet vs. 12.9 million.

Reflecting the relatively modest net absorption, the countywide office vacancy rate fell only slightly during the quarter, from 19.8 to 19.6 percent, according to G&E.

The office vacancy rate climbed most noticeably in the greater South Bay, where defense and aerospace firms continue to contract, G&E's report noted. That market's vacancy rate was 21.1 percent at the beginning of the fourth quarter, but climbed to 21.3 percent by year end.

Studley's figures indicate year-end vacancies were highest in the Los Angeles International Airport vicinity, at 26.7 percent, and in the balance of the South Bay area west of Long Beach, at 25.5 percent.

Burbank/Glendale's vacancy, at 12.4 percent, Pasadena, with 13.8 percent, and Santa Monica, at 14.1 percent, posted the lowest office vacancies in L.A. County.

The county's biggest office markets, downtown L.A. and the Westside, ended the year with vacancy rates of 23.9 percent and 21.0 percent, respectively, Studley reported.

Perhaps the more revealing indication of continued soft demand for local office space is rental rates. Studley reports that quoted lease rates are down from year-earlier levels in all major local markets.

Rates underlying December's downtown deals "are unbelievably low," commented CB's Schloessman. "We're really at an all-time low." Owners couldn't even cover property operating expenses if they went any lower, she continued. As tenants have jumped on the "most outstanding space opportunities," rents actually seem to have "started to inch back up," Schloessman explained.

"One of my clients indicated they wanted to wait another year," gambling that downtown rents might fall even further, she said. "I told them it would be a terrible mistake."

Among the larger tenants recently taking advantage of the opportunities downtown were insurance giant American International Group, which leased 105,000 square feet at Citicorp Plaza's new 777 Tower, and Hughes Hubbard & Reed, which leased 50,000 square feet at Two California Plaza.

Insurance brokerage firm Marsh & McLennan Inc. is another major tenant that real estate pros had expected to relocate from Mid-Wilshire to 777 Tower, but no announcement had been made as of mid-January. Sources have speculated that Pacific Enterprises' announcement that it will vacate 230,000 feet or more at First Interstate World Center may have motivated Marsh & McLennan to take another look at alternate downtown buildings.

The late-year deals brought 1992's gross downtown leasing figure up to about 3.4 million square feet, topping each of the three previous years, Schloessman stated.

Fourth-quarter figures from commercial brokerage firm Cushman & Wakefield of California Inc. illustrate that lower vacancies don't necessarily translate to firmer rents in a dangerously overbuilt market.

The downtown L.A. office vacancy rate has been falling since it peaked last June at 29.2 percent. It ended the year at 26.9 percent, after downtown tenants moved into 205,000 more square feet than they vacated in the fourth quarter.

However, the annual rental rate downtown L.A. landlords are asking for a typical "direct" deal, as opposed to a "sublease" deal from a tenant, fell from over $27 a square foot at the beginning of the fourth quarter to under $26 at year end, Cushman & Wakefield reported.

But if Marsh & McLennan does join AIG at 777 Tower, lease rates asked for the market's prime space could start turning around fairly soon, Schloessman predicted.

California Plaza's developers "have indicated they won't go down to meet the market," she elaborated. And with 777 substantially filled and no longer playing the "loss leader" role, Manulife Real Estate's 865 South Figueroa would become the only other new highrise with a substantial inventory of direct space, Schloessman said. Hence, major subsequent deals "won't reflect the tremendous competition" the market has been experiencing, she concluded.

Sources aren't as optimistic about the South Bay market. After another 56,554 square feet of "negative net absorption" during the fourth quarter, the South Bay ended the year with 282,193 more square feet sitting empty than when the fourth quarter began, explained Seeley Co. vice presidents Steve Cramer and Michael Condon.

In contrast, the South Bay's average annual positive absorption during "the aerospace years" of 1984-89 was about 1.8 million feet, they lamented.

Seeley calculated that South Bay office vacancy increased one point, to 21 percent, during the fourth quarter. That translates to 6.1 million feet of empty direct space sitting on the market. Including sublease space, the greater South Bay vacancy rate is 25 to 27 percent, and a whopping 44 percent in the Century/LAX submarket. Worse yet, Hughes Aircraft Co. started seeking a sublease tenant for its 500,000-square-foot Playa del Rey headquarters.

The relatively strong Tri-Cities market, encompassing Pasadena, Glendale and Burbank, suffered through a tough fourth quarter. While Studley reports that gross leasing there was up substantially for the quarter and for the year, Cushman & Wakefield figures indicate that Burbank posted a net loss of 50,000 feet of occupied space during the quarter, Glendale lost 10,000 feet and Pasadena was about break-even.

Glendale's vacancy rose a half point to 22 percent, according to Cushman & Wakefield. Pasadena's vacancy rose a point to 13.3 percent, and Burbank's vacancy rate jumped 1.2 points to 16.4 percent.

Farther west, in the San Fernando Valley, gross fourth-quarter office leasing activity mirrored the 1991 pace at about 350,000 feet, according to Studley statistics. However, activity for the entire year there was well above the 1991 level -- 3.2 million feet vs. 1.7 million.

Despite the 200,000-square-foot MGM lease and Broad Inc.'s 100,000-square-foot relocation to Century City, Westside leasing activity during the November/December period was actually down from 1991's final two months -- 1.25 million feet vs. 1.56 million, Studley reported.

For the year, however, gross 1992 Westside leasing of 9.1 square feet exceeded 1991's total by more than 1 million square feet. But during the same period, annual rents asked at new Westside buildings typically fell by $3 a foot.

Zugsmith said he doesn't see rents bouncing back any time soon, if ever. "I think the reality we're facing is that today's lease rates reflect what tenants can afford, and sale prices reflect true market values. It's not a 'valley' that's fallen from a 'peak' and will turn the other direction," he said. "I know other real estate professionals don't want to hear this, but they need to."