Drop in rents seems to work as vacancy rate begins to improve. (Real Estate Quarterly--Westside).

IF ever there were a textbook case on the effects of supply and demand, Westside office space is it.

A year ago, at the close of the third quarter 2001, average asking rents were $3.11 per foot for Class-A space in a market that sported a vacancy rate of 11.6 percent.

But over the course of 2002, as more product came on line and landlords struggled with vacancies that hit 15.7 percent by the end of the second quarter, they did what most businesses would to move product--they lowered rates.

It may be working. Vacancies in the third quarter dipped to 15.4 percent as asking rents on Class-A space reached $2.90 per foot per month.

The third quarter also saw the tide turned on the trend of negative net absorption. Led by the Santa Monica submarket, which had positive net absorption of 154,117 square feet (and saw its vacancies slashed by 1.5 percent, to 16.5 percent), the Westside absorbed more than 201,000 square feet.

To be sure, the submarket is still ailing. Cumulative net absorption over the first three quarters is still a negative 267,618 square feet, meaning there remains a lot of ground to be gained.

That, and the 7 percent decline in asking rents in a market with a great deal of new stock, means the better numbers are not enough to have landlords calling it a recovery quite yet.

Building owners, almost always an optimistic bunch, were muted when talking about the third quarter.

"It's a very soft market out there, and tenants are not into making decisions about leasing space," said Robert Flaxman, president of Crown Realty & Development Inc., which put the new 560,000-square-foot Water Ridge on the market in the third quarter. "It will change when we. start to see job growth, but right now I am not picking up even a glimmer of a change."

Flaxman has ma aged to lease 200,000 square feet of his project, a feat he attributes to having new product on the market, at "very competitive" rates and a location in unincorporated Los Angeles County, meaning tenants don't pay city taxes of Los Angeles, Culver City or Santa Monica.

Cuts continue

Despite the gains, Gerald Porter, vice chairman of brokerage firm CRESA Partners, called the submarket "pretty grim."

Until Westside companies begin hiring in earnest, he said, not much is going to change. "I can get you space, in a building on Wilshire right on the Beverly Hills city line, Class-A building, for $1.25 a square foot," said Porter.

Neil Resnick, a Westside broker with Grubb & Ellis, said he could place tenants in swanky Brentwood space for "$1.85 a square foot." A broker who didn't want to be quoted said space was available in Santa Monica's Water Garden complex at $1.25 a square foot, with cushy existing improvements.

Porter said he placed a tenant in the Water Garden Phase II building in the third quarter at $1.75 a square foot for five years, considered a lengthy lease at such bargain rates.

Some buildings are holding the line. One Wilshire tower in Santa Monica, with views of the Pacific and a short walk from the Third Street Promenade, is still leasing space at $4 a square foot, said Eric Olafson, broker with Cushman & Wakefield of California Inc.

And Century City's Fox Plaza, despite some vacancies, is holding the line as well.

But generally, rents are down. "You can find a lot of space in Santa Monica at $2 a square foot, if you can make the improvement work for your tenant," said Olafson. "The problem is that every company is different and wants different layouts."

Investment opportunities

While the office market slogs along, things have really perked in the multi-family investment market.

Real estate lawyer Adam Weissburg, with Cox Castle & Nicholsen, said all his Westside work this year has been in apartment deals--no office transactions. "That doesn't mean there were no completed office deals. Just that there certainly were a lot of apartment deals," he said.

When he did work or consult on office deals, Weissburg said, bank lenders want to see more equity, or "cushion" from buyers than before. Barring greater equity from investors, banks looked for other lenders to spread the risk. "Sometimes, you would see a proposal for mezzanine lenders to come in, after the buyers, but before the bank lenders," said Weissburg, referring to who would absorb losses in the event of foreclosure.

In general, institutional lenders want to see an investor put 25 percent to 35 percent equity into an office transaction, up perhaps 5 percent from a year earliet, said Weissburg, although he cautioned the situation varies from building to building and lender to lender.

Major Events:

* MTV Networks signed a four-year lease for a three-story, 45,000-square-foot building at 1633 26th St. in Santa Monica. Details were undisclosed, but the asking rate for the space was $2 a square foot.

* Immortal Entertainment Group inked a five-year lease for 24,000 square feet at the former eToys building in Kilroy Realty's Westside Media Center. Details were also not disclosed, but the asking rent at the property is around $2.75 per square foot.

* At the Wilshire Bundy Building, a 14-story office tower at 12121 Wilshire Blvd., the federal government signed a 10-year, $7.5 million deal for 20,400 square feet.

[GRAPH OMITTED]