Commercial real estate mirrors L.A.'s 2nd-quarter economic woes.

After 1993's slow first quarter, many local commercial real estate professionals were expecting better leasing activity during the second quarter. Most were disappointed.

The latest market surveys indicate many of L.A. County's office submarkets posted "negative net absorption" during the second quarter, i.e., tenants occupied less office space at the end of the quarter than at the beginning.

Grubb & Ellis Co. reports that the 32 million-square-foot downtown L.A. market managed to eke out about 150,000 feet of positive absorption -- a relatively depressing figure itself.

However, G&E says the big 44.5-million-foot Westside market posted a negative net of just under 100,000 feet, while CB Commercial Real Estate Group's figures note that the 35 million-foot Greater South Bay region saw its tenant base shrink more than 600,000 feet. G&E statistics indicate Mid-Wilshire, Pasadena, Glendale and the San Gabriel Valley all posted negative net absorption for the quarter as well.

Los Angeles County Office Market
Second quarter 1993
Submarket                      Vacancy      Vacancy      Change
                               6/30/93      6/30/92
Downtown L.A.                   22.6%        27.7%        -5.1%
Mid-Wilshire                    20.0         20.4         -0.4
Pasadena                        12.3         14.7         -2.4
Burbank, Glendale               11.3         12.5         -1.2
East San Fernando Valley        18.2         13.3         +4.9
West San Fernando Valley        19.3         21.2         -1.9
Conejo Valley                   21.4         18.8         +2.6
Hollywood                       19.5         14.4         +5.1
Beverly Hills                   20.4         22.9         -2.5
Century City                    15.3         16.9         -1.6
Westwood/West L.A.              20.7         23.3         -2.6
Santa Monica                    11.0         17.6         -6.6
Fox Hills/Marina del Rey(*)     21.5         NA           NA
LAX Area                        25.4         24.7         +0.7
South Bay                       23.0         29.1         -6.1
NA = Not available
* This is a new market area created by a recent reconfiguration
of some of Julien J. Studley's Westside market boundaries
Source: Julien J. Studley Inc.

The figures "reflect the economy -- there's just not a lot going on out there on the macro level," lamented Charlie McPhee, vice president/commercial marketing for Summa Corp., developer of Howard Hughes Center near the Fox Hills area.

Beyond insurer 20 Century Industries' $120 million commitment to its planned headquarters in Woodland Hills' Warner Ridge development, "the second quarter was disappointingly sluggish," added John Gebhardt, vice president with Voit Cos., the leading office developer in the San Fernando Valley's Warner Center commercial district. "We had a lot of deals in the works that didn't sign during the second quarter but should be inked during the third," he added, echoing many industry colleagues.

Steve Silk, senior director with brokerage Cushman & Wakefield Inc.'s South Bay office, said he expects at least four leases in the 60,000-foot-plus range to close soon along the 190th St. corridor.

"The second quarter was very slow, but it feels like the market picked up a lot of momentum," Silk suggested. "So I think we will lease more (South Bay office) space during the third quarter than we did all last year." The balance of 1993 should indeed see improved activity, agreed Alan Patterson, vice president at Trizec Properties Inc., which has extensive local office property holdings. "The deep breath we've been holding is slowly being exhaled; we now realize we can survive" the market depression, Patterson commented.

Reflecting the expectations of many other property pros, Patterson predicted "lots of big 40,000- to 100,000-foot (office lease) deals will likely close by the end of the year."

One of the big tenants that hasn't yet committed, Pinkerton Security & Investigation Services, is expected to sign on for 60,000 to 70,000 feet at Trizec's Independence Bank building in Encino. Likewise, the market still awaits expected signings of CareAmerica Health Plans (approximately 150,000 feet) in Warner Center's Trillium complex, and insurer Marsh & MacLennan Inc. (around 100,000) at downtown's 777 Tower.

In the Warner Center district alone, five tenants with requirements totaling 530,000 feet are "in various stages of lease negotiations," Gebhardt noted. But with these and another handful of major transactions around the county still in the works, the second quarter simply didn't boast any blockbuster lease deals.

Even in the historically resilient Glendale office submarket, net absorption of just 35,000 feet so far this year projects to a 10-year low, noted CB Senior Vice President Bill Boyd.

With local office properties still being absorbed at a relatively dismal pace, most major development plans predictably remain on indefinite hold. However, a few high-profile projects made significant progress during the second quarter.

Developer Jack Spound and his partners announced that financing is in place for the first phase of Warner Center's Warner Ridge complex, which is essentially a "build-to-suit" for 20th Century.

The massive Playa Vista project north of Los Angeles International Airport also made some progress during the quarter, as its first phase's final environmental report was released. McPhee said Playa Vista's residential and retail developments will represent a major boost for Howard Hughes Center -- where a new Sports Connection health club got under way during the quarter -- but he conceded that additional office development at Hughes Center is a long-term proposition.

"Realistically, I'm not terribly optimistic about the next 12 to 24 months," he related. "We're really looking more to 36 months and beyond for the level of improvement necessary to look at what we might build next."

But given the quarter's developments, it looks like construction will commence much earlier on three important local entertainment studio lots. Fox Inc.'s 771,000-foot expansion at its Century City property received the L.A. City Council's blessing during the quarter, and Sony Pictures Entertainment's 1 million-foot expansion in Culver City appears to have moved just a council meeting away from a final go-ahead. Warner Brothers Inc. also announced it hopes to break ground on a pair of 100,000-foot office buildings on its Burbank lot sometime this fall.

In downtown's development arena, the Metropolitan Transportation Authority's board cleared up a major controversy by resolving to house its entire headquarters staff at a new highrise going up near Union Station. The decision might have doomed developer Ray Watt's long quest to build his Watt City Center project just west of the Harbor (110) Freeway.

However, the Metropolitan Water District's search for a permanent home remained clouded as the agency filed suits during the quarter against the brokerage and law firm representing the MWD in an "interim" headquarters lease that fell apart after the lessor placed the property under bankruptcy protection.

One of the MWD headquarters' three "finalist" candidates, the proposed Three California Plaza tower on downtown's Bunker Hill, was among the latest wave of properties facing foreclosure pressure. The Community Redevelopment Agency's board gave developer Bunker Hill Associates a mid-May deadline to pay up its back-rent due on the site, but then let the deadline pass without taking any action.

Major lender "takebacks" occurring during the quarter included downtown's 375,000-foot 911 Wilshire highrise and Torrance's 400,000-foot Sky Park Office Center. "I think we will see more and more insurance companies foreclosing on local office properties," predicted Gerald Porter, president of Westside brokerage Metrospace Corp. "Rather than sell the properties during the down market, they're more likely to bring in asset management companies to handle them until pricing improves," he added.

The few office properties that did trade hands during the quarter illustrate why insurers would rather foreclose and hold, rather than sell now, Porter continued. "You look at the rents on the latest deals we're cutting, and they substantiate the prices we saw" on the latest office property sales, he added.

Although second-quarter sales of Westwood's Avco building and mid-Wilshire's 4221 Wilshire property followed up another handful of significant first-quarter Westside office sales, institutional investors are remaining on the sidelines amid lingering "uncertainty" about the market's future, suggested Tom Bak, senior vice president with Trammell Crow Co.

"While everyone is anxiously anticipating the prices (associated with) some big 'portfolio' sales we'll see in the near future, investment here has been stifled because the market hasn't revalued properties now that rents have suffered 20 to 25 percent drops," Bak elaborated. He said he expects high-quality industrial and business park properties to generate much more near-term investment interest than single office properties.

Bob Craven, president of mortgage banker Dwyer-Curlett & Co., said the local market "probably won't see a lot of sales" in the commercial property arena in the near future, primarily because rents are still "trending downward."