Countywide Vacancies Drop Despite Exodus On Westside.

THE "dot-bomb" implosion started a chain reaction that weakened the Westside office market during the fourth quarter, but the shock waves haven't hit in the rest of the county.

Countywide, office vacancy rates continued to drop and rents continued to rise in the last three months of 2000, despite the widening effects of Internet companies going out of business, soaring energy prices and more widespread concerns about how much a slowing national economy is likely to impact Los Angeles.

The overall vacancy rate in office buildings countywide was 11.8 percent as of the end of the fourth quarter, down from 12.3 percent in the third quarter and down from 16.7 percent at year-end 1999, according to Grubb & Ellis Co.

Countywide, the average monthly office asking rent during the fourth quarter was $2.36 per square foot, up from $2.29 in the third quarter and from $2.18 in fourth quarter of 1999, back when Y2K fears were rampant and the dot-coin frenzy was at its height.

But arguably the most memorable fourth-quarter action was on the Westside, L.A.'s largest and until recently hottest office market. More than 625,000 more square feet came onto the market than was-leased up during the fourth quarter, according to Grubb & Ellis: That "negative net absorption" can be attributed in large part to Internet and tech start-up companies going out of business.

For now at least, the Tri-Cities market (Burbank, Pasadena and Glendale) has over-taken the Westside as the area with, the lowest office vacancy rate in L.A. County.

Meanwhile, those who rode the Westside bubble during the dot-com frenzy now reflect on the "good old days" of a few months ago.

"That was the best Disneyland ride I ever had. It was a blast," said Ian Strano, senior vice president at First Property Realty Corp. "Unfortunately there are people now that are going to get hurt. We've advised every one of our clients that they re in a changing market. Those landlords who don't alter or don't move with the changing market, those guys who are going to stand firm, will be the landlords that are affected."

But placing too much emphasis, on the Westside's Internet-related weakness distorts the bigger picture. Strong leasing, activity in other markets far outpaced the Westside weakening.

"One of the ironies for us is we have more transactions in process now than we have had in the history of the company," said Jerry Porter, vice chairman of Cresa Partners. "But they're for the most part not West L.A.-based. The bubble has burst, and everybody (on the Westside) is going to suffer as a result. Santa Monica and its peripheral markets are going to feel it over the next 12 months. But it's in the context of a healthy economic climate in a growth environment in Southern California. In two or three years, you won't notice this has come and gone."

Porter said Cresa Partners expects to shortly announce a number of deals that involve biomedical research, networking infrastructure and software companies expanding into larger spaces. Still, he admitted, "it's also the case that all of these companies are suffering. It's putting in jeopardy all of the transactions."

Landlords who leased to dot-com companies are likely to have the most trouble weathering the next year or two. But few expect to see the level of bankruptcies that swept real estate during the recession of the early '90s.

"The financing requirements were a lot tougher (in the early 1990s)," said Rob Langer, managing partner of Meringoff Equities, a New York City-based commercial property owner that owns a lot of office product in Hollywood. "Buyers didn't overpay by as much as they could have (during the fourth quarter of 2000). They're going to have a tougher time making the numbers work, but you're not going to see nearly as many buildings going into bankruptcy or being taken back."

Even markets where rents are declining from their recent peaks will see rents stabilize at a level above where they where at the end of 1999, noted Craig Silvers, a real estate analyst with Sutro & Co.

Bargain hunting 

Deals inked in the high-vacancy submarkets of Wilshire Center and downtown L.A., the stars of the fourth quarter in terms of leasing activity, accounted for more than half of all absorption in the county during the fourth quarter.

Combined, more than 1.1 million square feet of office space was absorbed in the fourth quarter, meaning that much more space was occupied at the end of the quarter than at the beginning. In all of 2000, L.A. absorbed 4.8 million square feet of class-A office space in 2000, almost the same as the 5.0 million square feet absorbed in 1999.

Clay Hammerstein, senior managing director with Insignia/ESG, predicted that downtown L.A. would finally see its office vacancy rate drop in 2001 now that a wave of corporate mergers has come to an end.

"I think there has always been relatively robust leasing activity," Hammerstein said. "It's just been overshadowed by all the space we continued to dump onto the market."

He further said that a large number of leases will rollover in the next two or three years, prompting a lot of companies to think carefully about where to locate. "There are significant tenants in the market right now," Hammerstein said. "I think there's going to be a lot of moving chairs. My take on it is that, if the economy cools down considerably, tenants are going to be much more price sensitive than they have been in the past. As long as there is a price difference between West L.A. and downtown, some firms will start to look downtown."

Weak spots in the local office sector include downtown Long Beach, Burbank and Carson, where the fourth-quarter vacancy increased and rents remained flat or decreased.

Submarkets like Pasadena and the Conejo Valley have continued to perform well. "The growth out in those markets is in large part because of the affordable housing, quality of life and the ability to hire and retain employees," Porter said.

Westside rents may drop

Although asking rents on the Westside peaked above $3 in the fourth quarter, many industry observers expect Westside rents to drop in the first half of 2001. Monthly asking rents peaked at an average of $3.77 per square foot in Santa Monica, but that once-superheated submarket had more than 245,000 square feet of office space come back onto the market during the fourth quarter.

The overall Westside office vacancy rate rose to 7.8 percent in the fourth quarter, up from 6.4 percent in the previous quarter. Industry observers expect that trend to continue through the first half of 2001 and that landlords will respond by lowering their asking rents.

"There are still more (Internet companies) today that most assuredly will not be in business in three, fourth months," Silvers said. "Then what you're going to see is the Old Economy businesses that have been locked out of the market will start coming back to the market slowly."

Porter estimates that another 500,000 square feet of Westside office space will come onto the market in the first half of 2001, though he doubts that the vacancy rate will rise to the 10.5 percent level posted at the end of 1999.

"I think we're going to be shocked to see the dearth of demand behind these companies," Porter said. "Many of these traditional service-type companies have expanded as a result of these high-growth companies, and they're being forced to retrench. Think of all the investment bankers and (venture capitalists) and attorneys. That's all lost revenue to them right now."

The effect of the "dot-bomb" has primarily been seen in "creative" office space, mostly west of the San Diego (405) Freeway, said Jeff Resnick, president of First Property Realty Corp. Since the types of tenants most interested in that kind of space are entertainment companies, pending strikes in the entertainment industry will likely make it more difficult to lease that type of space in 2001.

Another downward pressure on Westside rents: Many tenants will see their long-term leases come up for renewal in the next year or two.

"A lot of these guys aren't going to be able to hit their renewals," Langer said. "You've got people paying $1.60 rents in a $3 market. They're going to move, and it's going to create vacancies. In the San Fernando Valley, Mid-Wilshire and Hollywood, you're not going to have as much pressure to bring rents down."

In addition, the Westside office market has the most new product under construction, at 1.5 million square feet, according to Grubb & Ellis.

Those construction projects might contribute to a short-term softening in the market, but the new product itself should lease up well, Langer said.

A dearth of construction and a narrow spread between the cost of renting older buildings and brand new buildings means that many tenants will likely opt to move into the newest buildings. "That's not net absorption, necessarily, but tenants will benefit from a market pricing that's very flat. That bodes well for new product. They're not competing against $1.75 (in monthly rent) opportunities."

Its weak fourth-quarter performance gives Santa Monica the dubious distinction of joining downtown Long Beach, Carson and downtown L.A. as the only submarkets that saw negative absorption in 2000 -- a marked contrast to the 807,052 square feet of positive net absorption that Santa Monica enjoyed in 1999. Downtown L.A. suffered the worst negative net absorption during 2000, as expected, with 331,745 square feet emptying out, followed by downtown Long Beach with 129,157 square feet and Carson with 59,520 square feet.

Industrial strength

In the fourth quarter, the L.A.-area industrial market roared along as usual. Countywide vacancy dropped further, to 3.7 percent, as tenants bought or leased another 12.5 million square feet of space.

The amount of industrial space now under construction is less than what was absorbed last quarter and less than 2 percent of the total industrial space available, which should keep industrial space tight.

Strong leasing activity in the San Gabriel Valley led the charge, as that market's vacancy rate dropped to 3.6 percent from 6.1 percent, with 3.8 million square feet being swallowed up. Next came Central L.A., with 2.3 million square feet of absorption and then the South Bay, with 2.2 million square feet.

In the fourth quarter, the average monthly asking rent in every market except the San Gabriel Valley had passed 50 cents per square foot, triple net (net of taxes, insurance and maintenance). The tight market in North Los Angeles -- which encompasses the San Fernando Valley, Santa Clarita and parts of Ventura County -- led the way with an average monthly asking rent of 59 cents per foot.

                     Los Angeles County Office Market,
                            Fourth Quarter 2000
                                              Vacancy Rate
                        Total    Vacant Space   4th Qtr.   3rd Qtr. 4th Qtr.
Market/Submarket      Inventory  (square ft.)     2000       2000     1999
Downtown L.A.        32,102,700   6,718,079      20.9%      22.0%    20.0%
Wilshire Center       7,300,405   1,027,173      14.1%      17.9%    21.1%
Central L.A.         39,403,105   7,745,252      19.7%      21.2%    20.4%
San Gabriel Valley    9,037,212   1,415,334      15.7%      17.9%    17.0%
Burbank               3,691,928    143,670        3.9%       2.8%     5.8%
Glendale              6,023,562    578,300        9.6%      13.6%    16.2%
Pasadena              5,920,362    193,309        3.3%       4.3%     5.3%
Tri-Cities           15,635,852    915,279        5.9%       7.5%     7.8%
Beverly Hills         5,329,236    518,305        9.7%       9.5%     8.7%
Brentwood             3,366,878    155,400        4.6%       4.8%     5.0%
Century City          9,000,887    349,396        3.9%       3.4%     5.1%
Hollywood/WeHo        2,742,917    313,410       11.4%      11.7%     9.6%
Marina/Culver City    4,739,687    295,679        6.2%       5.0%     4.5%
Miracle/Park Mile     5,445,167    675,459       12.4%       9.4%    10.1%
Santa Monica          7,090,497    493,665        7.0%       3.6%     0.6%
West Los Angeles      5,344,752    442,013        8.3%       7.9%     4.0%
Westwood              2,867,710    343,021       12.0%       8.9%    17.6%
West L.A.            45,927,731   3,586,348       7.8%       6.4%    10.5%
East Valley           3,090,169    251,746        8.1%      11.8%    10.1%
Central Valley        7,742,095    600,599        7.8%       9.2%     9.4%
West Valley           8,194,709    753,825        9.2%      10.4%     9.6%
Conejo Valley         3,644,071    351,917        9.7%       6.2%     6.3%
Santa Clarita Valley  1,285,350    383,256       29.8%      33.2%    35.1%
San Femando Valley   23,956,394   2,341,343       9.8%      10.8%    11.0%
LAX/Century Blvd.     4,080,481    877,190       21.5%      24.5%    29.5%
El Segundo/Man. Bch.  9,892,137    470,923        4.8%       5.3%    13.0%
Torrance Freeway      3,156,628    292,468        9.3%       9.6%    10.8%
Torrance Central      3,375,870    404,985       12.0%      12.6%    13.3%
Carson                1,284,001    255,682       19.9%      17.2%    15.3%
Long Beach Suburban   4,559,671    348,680        7.6%      12.4%    15.5%
Long Beach Dntn.      4,090,104    675,458       16.5%      13.6%    13.3%
South Bay            30,438,892   3,325,386      10.9%      11.8%    15.4%
L.A. County          164,399,186  19,328,942     11.8%      12.3%    13.0%
                        Under     Net Absorption (square ft.) [1]
                     Construction          4th Qtr.               3rd Qtr.
Market/Submarket     (square ft.)            2000                   2000
Downtown L.A.             0                 345,229                231,640
Wilshire Center           0                 282,083                186,373
Central L.A.              0                 627,312                418,013
San Gabriel Valley        0                 205,000                12,870
Burbank                249,000             (49,424)                 5,021
Glendale                  0                 306,716                38,421
Pasadena               139,187             (47,239)                17,690
Tri-Cities             388,187              76,127                 95,708
Beverly Hills          120,000             (40,319)                (6,577)
Brentwood                 0                (22,438)                28,799
Century City              0                 47,433                 102,292
Hollywood/WeHo            0                (62,225)                39,410
Marina/Culver City     788,000              173,534                56,800
Miracle/Park Mile         0                (23,757)                59,185
Santa Monica           505,400              176,895               (71,245)
West Los Angeles       150,000             (35,872)               (29,763)
Westwood                  0                 163,864                86,122
West L.A.             1,563,400            (646,582)               377,115
East Valley               0                (104,832)               64,254
Central Valley            0                 247,812               (68,638)
West Valley            566,432              86,019                 137,924
Conejo Valley          574,661             (34,131)                80,496
Santa Clarita Valley   255,000              69,891                (56,746)
San Fernando Valley   1,396,093             531,135                264,759
LAX/Century Blvd.         0                 121,948                117,096
El Segundo/Man. Bch.   128,000              54,311                 329,146
Torrance Freeway          0                 (5,338)                19,444
Torrance Central          0                 19,411                (106,597)
Carson                    0                (35,468)                12,919
Long Beach Suburban       0                 212,057                33,859
Long Beach Dntn.          0                (117,518)              (97,276)
South Bay              128,000              249,403                308,591
L.A. County           3,475,680            1,669,186               525,353
                               Class-A Asking Rent [2]
                     4th Qtr.       4th Qtr.           3rd Qtr. 4th Qtr.
Market/Submarket       1999           2000               2000     1999
Downtown L.A.         63,517          $2.28             $2.20    $2.19
Wilshire Center       137,442         $1.35             $1.34    $1.29
Central L.A.          200,959         $2.06             $2.06    $2.07
San Gabriel Valley    196,663         $1.97             $1.94    $1.85
Burbank               325,733         $2.72             $2.83    $2.43
Glendale             (11,166)         $2.12             $2.10    $2.35
Pasadena             (199,890)        $2.41             $2.38    $2.26
Tri-Cities            341,647         $2.47             $2.45    $2.34
Beverly Hills         113,122         $3.18             $3.03    $2.65
Brentwood             68,300          $3.38             $2.93    $2.69
Century City          21,693          $3.22             $3.02    $3.04
Hollywood/WeHo        118,085         $2.55             $2.42    $2.26
Marina/Culver City    67,832          $2.55             $2.66    $2.15
Miracle/Park Mile     (8,148)         $2.44             $2.35    $2.17
Santa Monica          346,937         $3.77             $3.59    $3.26
West Los Angeles       1,898          $3.04             $3.97    $2.51
Westwood              50,226          $3.74             $3.43    $3.08
West L.A.             666,275         $3.13             $2.92    $2.72
East Valley           10,906          $2.54             $2.29    $2.49
Central Valley        191,974         $2.07             $1.96    $1.84
West Valley          (36,895)         $2.48             $2.31    $2.20
Conejo Valley        (17,934)         $2.31             $2.29    $2.03
Santa Clarita Valley  25,628          $1.89             $1.86    $1.98
San Fernando Valley  (46,820)         $2.27             $2.13    $2.15
LAX/Century Blvd.    (46,961)         $1.53             $1.53    $1.35
El Segundo/Man. Bch. (25,230)         $2.80             $2.70    $2.25
Torrance Freeway      69,929          $1.96             $1.98    $1.70
Torrance Central     (29,330)         $2.31             $2.31    $1.80
Carson                58,303          $1.90             $1.90    $1.79
Long Beach Suburban   22,714          $2.44             $2.43    $1.82
Long Beach Dntn.      64,667          $2.09             $2.10    $1.92
South Bay             114,092         $2.27             $2.25    $1.92
L.A. County          1,917,450        $2.36             $2.29    $2.18
                Los Angeles County Industrial Market, Fourth
                               Quarter 2000
                         Total        Vacant    Vacancy Rate
                       Inventory      Space       4th Qtr.   3rd Qtr.
Market/Submarket      (square ft.) (square ft.)     2000       2000
Central LA            265,468,169   9,371,327       3.5%       3.6%
Mid-Cities             88,754,918   4,454,916       5.0%       5.5%
North Los Angeles [4] 171,527,321   7,015,393       4.1%       4.9%
South Bay             193,358,932   6,771,230       3.5%       3.3%
San Gabriel Valley    150,294,500   4,129,406       2.7%       3.6%
LA County Total       869,403,840   31,742,272      3.7%       4.0%
                                  Under     Sold & Leased (square ft.)
                      4th Qtr. Construction          4th Qtr.
Market/Submarket        1999   (square ft.)            2000
Central LA              1.3%    3,000,386           2,307,879
Mid-Cities              6.5%    1,289,452           1,937,428
North Los Angeles [4]   6.2%    1,678,672           2,142,111
South Bay               4.1%    3,132,879           2,237,937
San Gabriel Valley      6.1%    2,595,942           3,850,113
LA County Total         4.3%    11,697,331          12,475,468
                                           Asking Rent [3]
                       3rd Qtr.  4th Qtr.   4th Qtr.       3rd Qtr. 4th Qtr.
Market/Submarket         2000      1999       2000           2000     1999
Central LA            2,128,355  2,762,191    $0.50         $0.47    $0.44
Mid-Cities            1,842,911   794,290     $0.51         $0.51    $0.50
North Los Angeles [4] 1,831,879  1,617,331    $0.59         $0.59    $0.54
South Bay             3,149,677  1,741,407    $0.56         $0.56    $0.53
San Gabriel Valley    1,307,279  2,720,438    $0.48         $0.48    $0.47
LA County Total       10,260,101 9,635,657    $0.53         $0.52    $0.50

(1.)Net Absorption is the change in occupied space for a given period of time, excluding sublet space and renewals

(2.)Average monthly, per-square-foot rents

(3.)Average monthly, triple-net rents

(4.)Includes parts of Ventura County

Due to the transfer of owner/occupied space to competively leasable space and/or the delivery of new construction in the market, descrepencies may occur in the relation between vacancy rates and net absorption.

Source: Grubb & Ellis