Market remains active despite series of traumas; second quarter shows more space leased than vacated.

Rioting and a series of major earthquakes jolted Los Angeles-area real estate during the second quarter. But the heavy-duty damage continued to come from the Southland's continuing economic recession, with vanishing jobs hitting the entire real estate market.

Surprisingly, despite L.A.'s seemingly endless pink-slip parade, local companies continued to lease more new office space than they vacated during the second quarter.

But the dominant factor affecting the market was the persistent recession.

"The engine for commercial real estate is job creation, and it doesn't look like much of that is going to take place here for awhile," lamented Neal Roberts, director of real estate advisory services at Big Six accounting firm Coopers & Lybrand. "McDonnell Douglas, Hughes Aircraft and Bank of America are all making bad noises."

Since 1990, Los Angeles County has lost about 350,000 jobs due to the recession, according to the California Employment Development Department. That means local employment is now at late-1986 levels.

The key to improving L.A.'s slumping real estate market is finding new ways to employ the Southland's aerospace workers, before those workers move away, sources said.

"We have more technical talent in L.A. than anywhere else in the country," said Steve Friedman, western region director of real estate services at accounting firm Ernst & Young. "The challenge is to rechannel that technical expertise into creating new jobs, and that is going to take some time."

To be sure, there were bright spots in the latest quarter. For instance, local companies "absorbed" 612,005 square feet more office space than they vacated during the quarter.

Bob Bach, research director for the Pacific Southwest Region of Grubb & Ellis Co., explained the seeming incongruity -- office deals being signed amid a bruising economic downturn -- as being the result of companies deciding to sign new long-term leases to take advantage of today's bargain rental rates.

"Rents aren't going much lower," Bach asserted. "So tenants are locking in today's bargain rates in anticipation of future rent increases, even though they don't need the additional space right now."

As a result, the office vacancy rate likely won't come down when the local economy improves, because companies have already leased an excess of space.

Despite tenants leasing more space than they vacated, the L.A. County office vacancy rate still ratcheted up once again during the second quarter, to 19.2 percent. That compares to 18.6 percent just a quarter ago and 18.3 percent a year ago.

The vacancy rate rose, even though more space was leased than was vacated, because more than 1 million square feet of new space hit the market last quarter.

However, L.A.'s decade-long office build-up, the largest in local history, is now rapidly winding down.

Office construction activity countywide has dwindled to almost nothing, as commercial lenders continue their tight lending practices.

The amount of new office space now under construction in L.A. County totals just 948,711 square feet. That marks the first time new office construction has dipped below the 1 million-square-foot mark in almost two decades.

"This is the first time local construction has fallen below a million square feet since before we started tracking this information," confirmed Bach of Grubb & Ellis. "It's probably the first time since the recession of 1974."

The L.A. submarkets that experienced the most active office leasing during the second quarter were downtown L.A., Santa Monica, West L.A. and Glendale, in that order.

The submarkets that suffered the most tenant departures were Mid-Wilshire, LAX/Century Boulevard, Miracle/Park Mile, El Segundo/Manhattan Beach and East San Fernando Valley, in that order.

As expected, the aerospace-laden South Bay suffered worse than any other L.A. market.

Office tenants in the South Bay's seven submarkets vacated a total of 172,959 square feet more than they moved into during the quarter. Almost all of that "negative absorption" took place in two submarkets -- LAX/Century Boulevard and El Segundo/Manhattan Beach.

The LAX/Century Boulevard submarket, with the highest vacancy rate in the county (36.1 percent), is becoming more like a ghost town with each passing quarter.

Unfortunately, the two submarkets most heavily hit by the recent riots (Mid-Wilshire and Hollywood/West Hollywood) were losing tenants in large numbers long before the riots ever erupted.

Now those two submarkets will likely see the pace of that tenant exodus quicken, TABULAR DATA OMITTED unless some dramatic measures are taken to counter that trend, sources predicted.

While the overall short-term picture for L.A. County real estate is bleak indeed, at least a few bright spots do exist.

For example, a few large government agencies are expected to sign major lease deals in the coming months. Metropolitan Water District is seeking 600,000 square feet for its "permanent headquarters" location, a lease that would be worth well in excess of $100 million. The State of California, Los Angeles Police Department and several other public-sector tenants are seeking large blocks of space as well.

The only niches where developers are making any money these days are entry-level housing and shopping malls in first-rate locations.

Arguably the biggest real estate-related news story during the second quarter was the U.S. Supreme Court's decision to uphold the constitutionality of Proposition 13. That ruling relieved California's long-time property owners, and frustrated those who purchased property shortly before the market turned south.

The riots damaged or destroyed 1,050 buildings in the City of L.A. and scores more in other local cities. La Habra-based grocer Yucaipa Cos. -- owner of the Food 4 Less, Boys, ABC, Viva and Alpha Beta chains -- was probably hit the hardest. More than 40 of its stores were hit by the rioting and shut down.

The rioting also led to the Los Angeles County Assessor's Office being inundated with applications from local property owners seeking reassessments. It also sparked a heated political debate over whether or not the City of L.A. can legally dip into the surplus funds held by the Community Redevelopment Agency.

News of three major new commercial development projects in the works also surfaced during the second quarter. Hollywood Park announced a $100 million expansion of its Inglewood facilities; 20th Century Industries signed a letter of intent to have a new corporate headquarters campus built by Warner Ridge Associates in Woodland Hills; and a team led by Korea-based conglomerate You Wone Construction Co. Ltd. is proposing to develop a 570,000-square-foot mixed-use tower in Koreatown.

Also during the second quarter, L.A. County's most prominent developer, Maguire Thomas Partners, revealed that its founding partners, Jim Thomas and Robert Maguire III, would relinquish day-to-day control of the company to a three-man team comprised of Nelson Rising, Edward Fox and Richard Gilchrist.

Maguire Thomas Partners also pulled the plug on a major office tower it was planning to build on Bunker Hill in downtown L.A., and shifted the firm's geographic focus from L.A. to Sacramento.

Part of that shift involved several of the firm's top execs forming a separate partnership, which plunked down $140 million to purchase the Sacramento Kings pro basketball team and the arena where the team plays.

As for lease deals, Union Bank signed a 300,000-square-foot lease renewal in downtown L.A., worth an estimated $65 million. International Creative Management inked what was said to be the largest lease deal in Beverly Hills history. It involved the entire 78,000-square-foot building that was originally designed to be the new corporate headquarters for now-defunct Columbia Savings & Loan.

And Metropolitan Water District, after much debate and controversy, decided not to honor a 207,000-square-foot lease it signed last year at the WCT Building just west of downtown. The decision left Dinwiddie Construction Co. on the hook for $3 million in tenant improvement work it had built for MWD. The water agency then signed a 166,000-square-foot lease, worth $23 million, at Two California Plaza in downtown L.A.

Also, news surfaced during the second quarter that Metro-Goldwyn-Mayer Inc. is planning to relocate to Century City, which would mark a total withdrawal of MGM from Culver City where the movie company was founded in 1924.