Downtown sees significant decline in sublease inventory.In one of the most in-depth studies of the Downtown Los Angeles Downtown Los Angeles is the central business district of Los Angeles, California, located close to the geographic center of the metropolitan area. The sprawling, multi-centered megacity is such that its downtown core is often considered just another district like Hollywood or market, Cushman Realty Corporation (CRC (Cyclical Redundancy Checking) An error checking technique used to ensure the accuracy of transmitting digital data. The transmitted messages are divided into predetermined lengths which, used as dividends, are divided by a fixed divisor. ) reports a modest decrease in direct sublease sublease n. the lease of all or a portion of premises by a tenant who has leased the premises from the owner. A sublease may be prohibited by the original lease, or require written permission from the owner. vacancies during 1993 -- and a significant decline in sublease inventory as compared with 1992. The study focused on what is described as "The Central Business District" (CBD (Component Based Development) Building applications with components (objects). See component software. CBD - component based development ), defined as the area bounded on the north by Second Street, on the east by Olive Street, on the south by Ninth Street and on the west by Bixel Street. A total of 68 office buildings, encompassing 31.7 million rentable square-feet, were involved. Downtown Los Angeles sublease vacancy levels during 1992 and 1993 reached "historic highs," essentially three times the average availability of 600,000 rentable square-feet since 1982. The drop in sublease vacancies throughout last year was from 1.9 million to 1.7 million rentable square-feet. The result is a decrease of 0.8% to a sublease vacancy of 5.3%. By contrast, an audit of the sublease market showed a 6.1% vacancy rate. According to the study, this decrease in inventory "can be attributed in large part" to Bank of America's decision to take back approximately 330,000 rentable square-feet of sublease space at Beaudry Center. There was also significant activity from smaller start-up firm -- usually breakaway law firms -- which have been entering the market and taking advantage of historically low sublease rates. In addition to the Bank of America
Bank of America (NYSE: BAC TYO: 8648 ) is the largest commercial bank in the United States in terms of deposits, and the largest company of its kind in the world. move, the study identifies two other events which impacted the Downtown sublease market in a negative manner last year. These include the introduction of approximately 361,820 rentable square-feet of IBM (International Business Machines Corporation, Armonk, NY, www.ibm.com) The world's largest computer company. IBM's product lines include the S/390 mainframes (zSeries), AS/400 midrange business systems (iSeries), RS/6000 workstations and servers (pSeries), Intel-based servers (xSeries) sublease space at Wells Fargo Center Wells Fargo Center is the name of several buildings in the United States:
The study finds that along with the gradual downward slide in vacancies, "the characteristics of the sublease market have also changed." A key element in this "new" market is the trend toward shorter sublease terms. The percentage of available short term sublease space (0-5 years) is 65.2%, compared to last year's number of 34%. Another market characteristic appears to be a chronic oversupply o·ver·sup·ply n. pl. o·ver·sup·plies A supply in excess of what is appropriate or required. tr.v. o·ver·sup·plied, o·ver·sup·ply·ing, o·ver·sup·plies of institutional quality sublease space. This situation "has continued to depress rental rates throughout the market." It was also pointed out that the Class "A" or institutional quality buildings dominate the sublease market with over 70% of the available space -- a figure notably higher than last year, due to the presence of IBM and Security Pacific Bank sublease spaces. The sublease space included in the study is for the most part being marketed by law firms, technology, and financial service companies. These three business categories combined total approximately 75% of the market with law firms representing approximately 35% of that total. The study attributed falling rental rates in institutional quality sublease space -- all other categories remained stable -- from 1992 levels because of the predominance of this category of space on the market. According to the study, asking rental rates in institutional sublease space dropped from $19.11 per rentable square-foot per annum Per annum Yearly. , fully serviced gross, in 1992 to $14.52 per rentable square-foot per annum, fully serviced gross in 1993. In all categories of buildings, however, the study noted that actual negotiated rental rates barely cover operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. and real estate taxes. Not taken into account was "phantom space" or space which is unused by a tenant but not actively marketed. Phantom space in Downtown Los Angeles is estimated to total approximately one million rentable square-feet. Regarding the future of the sublease market, Cushman Realty Corporation offers this cautiously optimistic assessment: "Although we continue to see minor additions to the sublease market, Cushman Realty Corporation has not identified any major blocks of sublease space that are poised to enter the market over the near term." It is also noted that, "as the inventory of sublease space continues to diminish, the direct lease rates will begin to trend upward." Steven E. Marcussen is vice president of Cushman Realty Corporation. |
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