Glut of sublease space keeping downtown L.A. soft.

Mergers and consolidations hitting office market hard

The downtown Los Angeles office market continued to be hampered by an excessive amount of sublease space during the second quarter. And that sublease glut will not likely be significantly alleviated for months to come.

It is the sublease space, according to Bob Caudill, a downtown broker with commercial brokerage firm Grubb & Ellis Co., that is keeping office rental rates depressed.

The source of the sublease space, he said, has been "mergers, for the most part, and typical recessionary stuff" that has forced firms to downsize, thereby decreasing their need for office space.

"A few years back, firms were projecting growth, and now they have excess space," he said.

According to statistics provided by commercial brokerage firm Julien J. Studley Inc., the average annual asking rental rate for all downtown buildings declined to $23.33 per square foot during the May-June 1993 period. That compares with $25.69 a foot during the like period of 1992.

Studley reported that the office vacancy rate for downtown Los Angeles at the end of the second quarter was 22.6 percent. Although that figure remains higher than nearly any other office market in Los Angeles County, it is significantly lower than the 27.7 percent downtown office vacancy rate recorded for the like period last year.

The Studley report attributed downtown's lower vacancy rate to tenants being attracted to downtown because of that market's bargain rents. The bargain rents are the result of intense competition between commercial landlords desperate to get tenants into the overabundance of empty downtown office space.

Besides low rents, the downtown office market will likely become even more attractive to tenants as the Metro Rail subway and light rail system expands its reach and the renovated and expanded Central Library re-opens, Studley predicted. These improvements will probably send the downtown office vacancy rate down even further, Studley reported.

Competing brokerage firm Grubb & Ellis Co. reported a slightly lower second-quarter office vacancy rate for downtown L.A. -- 20.17 percent.

Competing brokerage firms often report slightly different vacancy rates, and sometimes vastly different rates, because they look at different populations of office buildings and use different research methodologies.

Drew Planting and Hayden Eaves, brokers with another competing brokerage firm, Cushman & Wakefield of California Inc., asserted that the eventual turnaround of downtown L.A.'s office market hinges on the vast amount of sublease space being rented out.

Nevertheless, both said they were optimistic about the future of downtown, based on activity in the second quarter.

"Activity is this market picked up in the second quarter, compared to the first," said Eaves. Most of that activity, he stated, is coming from smaller tenants that had been housed in "Class B" or "Class C" buildings but were now upgrading to "Class A" space to take advantage of the depressed rents.

Evidence supporting that assertion is that downtown L.A. experienced a "positive net absorption" in the second quarter of 153,869 square feet, Cushman & Wakefield reported. Net absorption is the amount of space newly occupied by tenants in a given period minus the amount of space vacated.

So tenants moved into 153,869 square feet more downtown L.A. office space than they vacated during the second quarter.

Planting also pointed out that there may be some big deals hitting downtown L.A. in the not-too-distant future, as several governmental agencies continue searching for large blocks of space there.

"The MTA (Metropolitan Transit Authority) continues to jockey between a few downtown spaces; although they appear to be leaning toward Catellus' (project adjacent to Union Station)," said Planting. "Also, the State of California may be looking to occupy up to 600,000 square feet of space in downtown."

Planting also pointed out that the California Department of Transportation may be looking to lease approximately 100,000 square feet in downtown L.A.

Among the noteworthy second-quarter lease deals was Travers Realty Corp.'s move to the 26th floor of the Koll Co./Obayashi America building at 550 S. Hope St. That relocation involved 8,073 square feet for 10 years. Travers had been in the Wilshire Center District at 3530 Wilshire Blvd. for a number of years before making this move.

Guardian Bancorp renewed and expanded the downtown L.A. lease of its principal subsidiary Guardian Bank. That deal involved Guardian Bank expanding its headquarters lease to 37,000 square feet from 25,000 square feet at Figueroa Tower, located at 800 S. Figueroa St.

The law firm of Murchison & Cumming leased 40,812 square feet at Shuwa Investment Corp.'s downtown office building at 801 S. Grand Ave. This was another example of a firm moving to downtown L.A. from the Mid-Wilshire area.

The Japanese Consulate relocated to new downtown L.A. office space. Formerly housed in the Kajima building in Little Tokyo, the consulate moved to 22,990 square feet at Two California Plaza. A lease was signed for 10 years.

As for vacancies, another big chunk of office space recently went on the downtown L.A. sublease market as a result of Carter Hawley Hale Stores Inc.'s Chapter 11 bankruptcy.

The 90,000 square feet that Carter Hawley Hale had occupied was originally leased to a division of Atlantic Richfield Co. which was moved to Texas. Carter Hawley had been subleasing the space from Arco until the retailer's Chapter 11 bankruptcy filing.