L.A. County office vacancy rate drops as deals abound.

Commercial tenants in Los Angeles County continued to take advantage of cash-strapped developers during the first quarter of 1992 by negotiating some of the lowest effective lease rates in years.

The bargain-motivated leasing activity caused L.A. County's overall office vacancy rate to drop to 18.6 percent, down from 19.2 percent at year-end 1991.

Much of that leasing activity once again took place in downtown Los Angeles, where the largest build-up of office inventory in L.A. history has severely depressed rental rates.

"Downtown's effective lease rates dropped 15 percent in the past quarter," reported Robert Caudill, veteran downtown broker at Knight Frank Faulkner Baillieu. "We're at a point now where building owners are going to have to say, 'This is our bottom line; we will go no lower.'"

Further depressing downtown lease rates is the burgeoning amount of high-quality, low-priced sublease space hitting that submarket, as large corporate tenants move into new towers.

Between 500,000 and 1 million square feet of sublease space is now available in downtown L.A., and that amount is expected to possibly double as Security Pacific Corp. merges with BankAmerica Corp. in coming months. Security Pacific alone leases some 1 million square feet of office space in downtown L.A.

The depressed lease rates even caused some new downtown towers, including Two California Plaza, to temporarily halt marketing efforts during the first quarter. Those marketing efforts likely won't resume until market conditions improve substantially.

Also awaiting improved conditions are a gaggle of monster projects. Chief among those are Los Angeles Center, Metropolis and Watt City Center.

Besides downtown, other local submarkets that experienced robust office leasing activity during the first quarter were Santa Monica, Beverly Hills and Marina/Culver City -- as tenants relocated to, or expanded in, those submarkets.

The east San Fernando Valley also continued its impressive performance as L.A. County's tightest office market, with less than 5 percent vacancy. That submarket could loosen up considerably in coming months, however, as Sony Pictures Entertainment continues relocating its Burbank operations to Culver City; Cushman Realty Corp. breaks ground on its NBC Plaza tower; and Walt Disney Co. gets going on its proposed studio expansion.

Somewhat surprisingly, suburban Long Beach was L.A. County's third most-active submarket during the first quarter, in terms of leasing. Only downtown L.A. and Santa Monica were more active.

But even after posting 106,085 square feet of net newly occupied space for the quarter, suburban Long Beach still has a less than impressive vacancy rate of 20.4 percent. Meanwhile, downtown Long Beach's vacancy rate is an embarrassing 28.2 percent.

"Long Beach has lost all its momentum and focus," said Ronald Malmfeldt, Los Angeles managing director for Landauer Real Estate Counselors. "The city fathers have been unable to deal with crime and social issues; they lost Disney; and now they don't know what to do with the Queen Mary. All that has combined to create a malaise that's infecting the entire city."

Downtown Long Beach tenants actually vacated 7,637 square feet more than they moved into during the first quarter.

Other local submarkets that suffered a net exodus of office tenants during the quarter were the San Gabriel Valley, Westwood, Hollywood/West Hollywood and most parts of the San Fernando Valley. In most cases, tenants left those submarkets for newly built, low-priced space in downtown L.A., Santa Monica, Glendale or elsewhere.

The continuing Hollywood/West Hollywood exodus seems to be causing the most concern among local officials, who have unsuccessfully tried to launch a major redevelopment campaign there for years.

Among the companies who left or decided to leave Hollywood/West Hollywood during the first quarter were Univision Holdings Inc. and its KMEX Channel 34 TV station, Warner/Chappell Inc., Modern Video Film, BPI Communications Inc. (publisher of the Hollywood Reporter) and Petersen Publishing Co.

Among those expected to leave Hollywood/West Hollywood in the near-term future are Fox Television, International Creative Management, the Screen Actors Guild and Capitol Records Inc.

While private-sector leasing activity did pick up in the first quarter, public-sector leasing is expected to provide the bulk of activity in months to come.

Among the government agencies looking to ink major office deals soon are the Los Angeles County Transportation Commission, the Metropolitan Water District, the California Department of Transportation and the Los Angeles Police Department.

The MWD already signed a major five-year interim office lease late last year at the WCT Building near downtown Los Angeles. But the water wholesaler ran into big troubles in the first quarter, when the building's owner went into default on its mortgage payments.

MWD was scheduled to move into the WCT Building this month. But tenant improvement work has been halted and the move-in delayed until the building's owner can work out its financial problems.

On the financing front, commercial real estate lenders became even stingier during the first quarter of 1992.

First quarter office market statistics
                                          Year-ago    Change in
                               Vacancy    vacancy       vacancy
Submarket                     rate (%)    rate (%)     rate (%)
Downtown L.A.                   20.3        19.5           +0.8
Mid-Wilshire                    16.9        16.4           +0.5
Glendale                        16.6        11.7           +4.9
Pasadena                         9.2         9.4           -0.2
San Gabriel Valley              25.3        23.7           +1.6
East San Fernando Valley         4.7         4.9           -0.2
Central San Fernando Valley     16.6        15.9           +0.7
West San Fernando Valley        23.6        18.3           +5.3
Conejo Valley                   25.0        19.2           +5.8
Santa Clarita Valley             9.4         5.5           +3.9
Beverly Hills                   21.0        20.9           +0.1
Brentwood                       15.7        14.9           +0.8
Century City                    14.2        15.6           -1.4
Hollywood/West Hollywood        16.8        11.2           +5.6
Marina/Culver City              23.1        22.3           +0.8
Miracle/Park Mile               15.9        23.8           -7.9
Santa Monica                    20.5        14.3           +6.2
West L.A.                       17.5        16.8           +0.7
Westwood                        26.4        22.2           +4.2
LAX/Century Blvd                33.5        32.7           +0.8
El Segundo/Manhattan Beach      12.6        10.5           +2.1
Torrance Freeway                22.6        25.4           -2.8
Torrance Central                18.3        23.1           -4.8
Carson                          23.2        22.1           +1.1
Long Beach Suburban             20.4        19.2           +1.2
Long Beach Downtown             28.2        26.9           +1.3
Los Angeles County Total        18.6        17.9           +0.7

"The single most dramatic feature of the first quarter and, unfortunately, of the second quarter is the decreasing availability of capital financing for any new construction," asserted Allan Kotin, nameplate partner at the real estate economic consultancy of Kotin Regan & Mouchly. "Three months ago I thought lenders had already exercised all their restraint. But the restraint is continuing to intensify."

Lenders are now requiring a 12 to 13 percent return on cost, as opposed to 9 or 10 percent just 18 months ago, he said.

Those returns are no longer being calculated on projected revenues the building is expected to generate upon lease-up. They are instead now being calculated strictly on actual prelease commitments. And those preleasing commitments had better be for 70 percent of the project's total space, or more.

Plus, developers must personally put up enough equity to cover whatever percentage of the project is not preleased.

"I'm working on four development deals right now, and the weakest one has a 70 percent preleasing commitment," Kotin said. "Not a single one will go through unless there's a 30 to 40 percent equity commitment (from the developer)."

Major U.S. pension funds, at the urging of President Bush, expressed a willingness during the first quarter to at least partially fill the real-estate-capital void left since banks and thrifts withdrew from commercial real estate in the late 1980s.

But even the pension funds have now shut off additional funds to the market, at least until the Securities and Exchange Commission figures out how to regulate the exploding number of private-sector pension fund advisers.

Meanwhile, at least three other factors are combining to make capital availability even scarcer in coming months, sources said.

* First, the local recession is expected to worsen before it improves. And those recessionary hits will be exacerbated by the mega-merger of Security Pacific Corp. and BankAmerica Corp.

Due to huge layoffs in L.A. County, many corporate tenants now lease far more space than they use. Hence, even after the recession ends and local companies begin hiring again, new space won't be leased until companies refill their existing under-utilized space.

* Second, the Resolution Trust Corp. is continuing to sell a tremendous amount of commercial property at bargain prices. And those RTC sales are further depressing the market.

* Third, a huge number of so-called "mini-perm" real estate loans issued during the late 1980s are coming due during the next two years. The amounts owed on these loans, which have terms of five to seven years, in many cases now exceed the properties' market values.

If large numbers of developers decide to walk away from their mini-perms, there could be another wave of financial institution failures, sources warned.

The disappearance of new capital financing, coupled with L.A.'s glut of commercial space, has resulted in a dramatic slowdown in building new office space. Less than 2.5 million square feet of new office space is now under construction in L.A. County, which is 70 percent less than a year ago.

The vast majority of that new space is being built in downtown L.A. In fact, more than twice as much new space is being built in downtown L.A. than is under construction in all the other 25 L.A. County submarkets combined.

Once that new space is completed, very little new office construction is expected for quite some time.

Los Angeles County's industrial real estate market had a rougher ride than the office market did during the first quarter of 1992.

Despite a dramatic slowdown in new industrial construction, vacancy rates for all five L.A. County industrial markets have risen in the past year. That increase is largely due to defense cutbacks and the continuing exodus of major manufacturers from Southern California.

The overall industrial vacancy rate for L.A. County at the end of the first quarter was 12.3 percent, compared with 10.0 percent a year ago. That rise in empty space came despite a 69 percent reduction in the amount of new industrial space under construction in L.A. County. About 1.5 million square feet of new industrial space is now being built here, compared with 4.8 million square feet a year ago.

Industrial markets languishing the most are "L.A. North," which includes the San Fernando, Santa Clarita and Conejo valleys, and "Mid-Cities," which includes the industrial strongholds east of the Long Beach (710) Freeway and south of the Pomona (60) Freeway. Mid-Cities' hubs include Commerce, Santa Fe Springs, La Mirada and Downey.

The net amount of newly occupied space in "L.A. North" during the first quarter was 1.797 million square feet, down 60 percent from a year ago. The net amount of space newly occupied in "Mid-Cities" during the first quarter was 656,521 square feet, a 6 percent reduction from a year ago.

Meanwhile, the South Bay industrial market turned in a relatively strong first-quarter performance. The 2.15 million square feet of net newly occupied space there represented a 42 percent improvement from a year ago. Despite that strong leasing performance, the South Bay's industrial vacancy rate increased to 11.9 percent from 9.7 percent a year ago.