Largest sale of 1990s closes in 2nd quarter.

Nestle USA headquarters sells for $115 million

L.A. County's biggest office property sale of the 1990s was transacted during the second quarter of 1995, and principals finalized terms of an even bigger investment transaction. But despite those highlights, commercial real estate activity on the "user" side in general was surprisingly slow during the quarter.

The L.A. area's office markets actually lost a bit of ground during the second quarter, as their collective tenant base shrank by some 415,000 square feet, according to brokerage giant CB Commercial Real Estate Group Inc.

That left the overall vacancy rate for the L.A. area's 148 million-square-foot office universe - which includes Ventura County and the western Inland Empire - hovering at 19.2 percent, a half-point above its rate a year ago. This comes after a first quarter during which the market lost about 48,000 square feet of office tenancy, CB Commercial reported.

Despite slack demand from property occupants, capital is once again aggressively pursuing commercial real estate investments in the L.A. area. But that trend is not necessarily contradictory, opined Rich Davis, the senior managing director overseeing brokerage Cushman & Wakefield Inc.'s Southern California operations.

"We like to think there's a direct correlation" between user demand and investment activity, "but it's not that direct," Davis continued. Investment decisions

Please see Overview page 4A

Overview: Sale of Water Garden nears

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have typically been made during previous quarters and aren't really affected by leasing figures from just one or two quarters, he said.

Gargantuan deals

Highlighting the second-quarter investment activity was a Douglas Emmett Realty Advisors affiliate's purchase of Glendale's 500,000-square-foot Nestle USA Inc. headquarters - reportedly for $115 million. And as the quarter closed, the sale of Santa Monica's 666,000-square-foot Water Garden complex was being finalized - reportedly a $190 million purchase by a J.P. Morgan & Co. Inc. investment group.

While L.A.'s office tenancy shrunk during the quarter, there was better news on the industrial real estate front.

According to CB figures, vacancy within greater L.A.'s 944 million square feet of industrial buildings fell one-half point during the quarter - to 8.4 percent - in the wake of about 12.5 million square feet of sales and leasing activity. That outpaced the first quarter's activity by about 1 million feet. The L.A. area's industrial vacancy rate has dropped 2.5 percentage points over the past 12 months.

"We've been seeing a very real and perceptible increase in demand (for industrial real estate) late last year and early this year," Davis noted. Consequently, "rental rates across the board in almost all the local markets have spiked upwards. ... No one really knows how long that will last, but the first six months of this year have proven very strong."

While local residential real estate markets have generally continued to struggle, news of a possible mega-merger on the local residential brokerage scene surfaced during the quarter. Executives of both firms refused to acknowledge that a deal is in the works; but reports quoted industry sources suggesting: that the big Jon Douglas Co. and Prudential California Realty operations are about to combine forces into a super-agency.

Weak links strengthen

While major news in the commercial real estate arena was sparse during the quarter, industry professionals were likely encouraged that two of L.A. County's most troubled office markets - downtown L.A. and the South Bay - posted positive net absorption figures during the quarter.

(Net absorption measures the quarter-by-quarter rise or fall in the total amount of space occupied within the measured market; i.e., the amount of space leased less the amount vacated.)

Thanks in part to the Army Corps of Engineers' $29 million lease of 140,000 square feet at downtown's 911 Wilshire Tower - in a move from government-owned property in the Civic Center, which isn't tracked in office surveys - the 30.3 million-square-foot downtown L.A. market was the distant winner in the second-quarter's office absorption derby.

CB's figures indicate downtown L.A. absorbed just under 320,000 square feet during the quarter.

Other second-quarter highlights downtown included The Chubb Insurance Group of Cos.' lease of 72,000 square feet at the 801 Tower, in a consolidation move from the Miracle Mile and Warner Center; Atlantic Richfield Co.'s long-term lease renewal at its namesake high-rise complex; and Unocal Corp.'s announced headquarters relocation from downtown to El Segundo.

The 27.3 million-square-foot South Bay commercial market likewise posted a positive performance during the second quarter, as its tenant base absorbed about 127,000 square feet of space.

Bolstered in part by the Unocal deal, the South Bay's El Segundo submarket was especially strong during the quarter, posting [TABULAR DATA OMITTED] positive net absorption of 120,000 square feet. Another South Bay highlight was McDonnell Douglas Corp.'s lease of 272,000 square feet in three buildings near the Long Beach Municipal Airport.

Unfortunately for landlords, tenant bases in all other L.A. area office markets shrank during the quarter.

Ironic twist

Somewhat ironically. an improving marketplace - after years of commercial property depression - may explain the anemic activity, commented Robert Chavez, a partner at the Brentwood-based Metrospace Corp. brokerage.

As rents have finally just begun to firm, some landlords are "pushing too hard; they're seeing a crack in the door and are trying to swing it open," Chavez said. "But tenants aren't ready to hear it yet, and they're resisting - so the gap in expectations is getting wider."

For that reason or others, second-quarter net absorption figures were rather dismal in most L.A.-area office markets.

Even the 15.6 million-square-foot, high-momentum Tri-Cities market (Burbank, Glendale, Pasadena and surrounds) lost nearly 135,000 square feet of tenancy during the quarter - with low-vacancy Burbank and Glendale losing about 74,000 and 82,000, respectively.

Property pros explained that dealmaking there was off because Burbank in particular, and now Glendale as well, have hardly any major contiguous blocks of office space available. To secure office space near its headquarters, Walt Disney Co. leased an entire 120,000-square-foot industrial-type building in Burbank and plans to convert it for office-type uses.

Nearby, an affiliate of K. Young & Co. announced plans to relieve the Glendale tightness with a new speculative 400,000-square-foot office development, slated to break ground by year end.

The Mid-Wilshire/Hollywood area, a 14 million-square-foot market, lost about 152,000 square feet from its tenant base during the quarter. Chubb's announced relocation from 80,000 square feet in the Miracle Mile district certainly didn't help that market's cause.

Emptier valley

The 15.7 million-square-foot San Fernando Valley market likewise suffered more than 150,000 square feet of negative net absorption. A key second-quarter deal there was Panavision Inc.'s announced 150,000-plus-square-foot relocation from Tarzana to the former Dataproducts Corp. headquarters space in Warner Center.

But Mike Zugsmith, chairman of brokerage Capital Commercial Real Estate, said his "perception is contrary" to CB's absorption statistics.

"We handled lots of sales and leases during the quarter; everyone I know is very busy," Zugsmith continued. "We're seeing continued improvement in the economy regionally, and that's translating into lots of money for real estate."

Even L.A.'s 32.7 million-square-foot Westside market, which had been posting relatively strong leasing and absorption figures in recent months, lost more than 100,000 square feet from its tenant base.

But Todd Later, senior marketing manager with developer/asset manager Hines Interests LP, pointed out that big blocks of quality Westside office space are dwindling to a handful - particularly in the wake of several recent and pending major lease transactions primarily involving the entertainment industry.

However, cautioned Howard Sadowsky - the executive vice president overseeing brokerage Julien J. Studley Inc.'s West Coast operations - major users will be vacating nearly 1 million square feet of Westside office space in coming months.

While that situation suggests solid opportunities for other users, it should also "keep everyone sober" about any dramatic near-term uptick in rental rates, Sadowsky added.

"Let's not get fooled about what's going on in the marketplace," the veteran local brokerage executive advised.

"It's easy to forget that the bathtub has a drain as well as a faucet," added Metrospace's Chavez.