Quake slams outdated L.A. commercial structures: destruction likely to help alleviate chronic glut of space.

Two weeks into the new year, most L.A. County real estate professionals suddenly forgot about the internationally reported natural disaster low-lighting their industry's fourth quarter -- Southern California's fall wildfires. During a tumultuous early-morning half-minute, an even more devastating disaster, Jan. 17th's 6.6-magnitude Northridge earthquake, damaged or destroyed nearly 2,000 residential and commercial buildings. Total damages, as of last week, were estimated at about $30 billion.

After a disappointing fourth quarter -- especially in the commercial property sector -- it wasn't exactly the kind of bang with which the industry had hoped to kick off the new year. But that industry's ever-optimistic members managed to find various silver linings amid the quake's dust clouds.

While real estate sources uniformly lamented the tragic losses of life, property and commerce, several also pointed out that much of the worst property damage was to older structures not meeting current building codes. Sources also pointed out that displaced tenants will likely absorb significant sums of the local market's vacant high-quality facilities -- most of which survived the shaking impressively. They predicted the suddenly shrunken markets would return to pre-quake activity levels after a six-month "detour." "We had all been trying to figure out when the local real estate market would really bottom out, when things would finally start to turn around," said Keith Green, a partner with the TOLD Partners commercial brokerage in Woodland Hills. "Well, the market hit bottom on the 17th."

In the quake's immediate aftermath, thousands of displaced Angelenos sought temporary shelter while struggling to determine if their homes could return to habitability. Presumably, many were owners or employees of the hundreds of business enterprises the quake temporarily or permanently forced from damaged business properties.

The damage and destruction to local residential properties -- heaviest surrounding the quake's epicenter in the San Fernando Valley, as well as the Santa Clarita Valley to the north and Santa Monica to the south -- will undoubtedly leave at least a short-term mark on the market.

Los Angeles County Office Market
Fourth Quarter 1993

                                      Vacancy           Vacancy
Submarket                            12/31/93          12/31/92         Change

Downtown L.A.                           20.0%            21.2%           -1.2%
Mid-Wilshire                            25.5             21.6            +3.9
Pasadena                                12.3             12.5            -0.2
Glendale                                15.7             13.6            +2.1
San Gabriel Valley                      19.0             23.6            -4.6
Central L.A. Total                      19.4             20.0            -0.6

Beverly Hills                           23.6             21.8            +1.8
Brentwood                               15.4             15.6            -0.2
Century City                            14.6             13.7            +0.9
Hollywood/W. Hollywood                  16.7             17.4            -0.7
Marina/Culver City                      18.7             22.2            -3.5
Miracle/Park Mile                       23.4             24.0            -0.6
Santa Monica                            12.5             12.3            +0.2
West L.A.                               18.6             20.9            -2.3
Westwood                                29.4             30.4            -1.0
Westside Total                          18.6             18.9            -0.3

East Valley                              7.3              6.7            +0.6
Central Valley                          15.2             17.6            -2.4
West Valley                             20.2             20.5            -0.3
Conejo Valley                           19.7             21.5            -1.8
Santa Clarita Valley                     8.9             12.5            -3.6
San Fernando Valley Total               14.5             16.3            -1.8

LAX/Century Blvd.                       41.3             35.8            +5.5
El Segundo/Manhattan Beach              12.8             14.2            -1.4
Torrance Freeway                        27.8             24.6            +3.2
Torrance Central                        18.9             19.8            -0.9
Carson                                  19.3             16.6            +2.7
Long Beach Suburban                     22.0             22.4            -0.4
Long Beach Downtown                     25.0             27.4            -2.4
South Bay Total                         22.2             21.8            +0.4

Los Angeles County Total                19.0%            19.5%           -0.5%

Source: Grubb & Ellis Co.

"Values certainly won't go up as a result of the earthquake, but vacancies will definitely decrease in the short term," noted Bernie Haddigan, who manages investment property brokerage Marcus & Millichap's Encino office. What will happen is that buyers and their lenders will re-inspect properties subject to pending purchases, "and most buyers will use (the quake) as an opportunity to renegotiate" prices and terms, he added.

"I think it's too early to determine fully the (quake's) economic impact on real estate values, but I feel we will see at least a short-term shortage of attractively priced rental units -- especially in tight areas like Santa Monica," said Rick Merrill, president of the Prudential California Realty residential brokerage.

He also suggested that many single-family owners possessing little or no equity might opt to relinquish homes to their lenders "rather than getting another low-interest loan and rebuilding."

Retail real estate, particularly in the Northridge vicinity and along the San Fernando Valley's primary east-west commercial corridor -- Ventura Boulevard -- also took quite a hit. The big Northridge Fashion Center regional mall sustained extensive damage, several other malls closed temporarily, and smaller retail properties along Ventura suffered various maladies.

Modern office towers generally weathered the quake well, but older commercial buildings -- particularly those of the unreinforced masonry variety -- will require extensive repairs if they are to survive. Commercial and medical office properties in the north and west San Fernando Valley, all along Ventura Boulevard and even on L.A.'s Westside and in Santa Monica, suffered debilitating damage.

Amid what many brokers described as a "feeding frenzy" of tenants seeking safe quarters, sources suggested that Class A properties immediately upped their competitive advantage over older facilities. They also stressed that once heavily damaged properties are replaced, L.A.'s real estate stock will be much safer -- giving users significantly greater comfort about remaining in the region.

As expected, real estate pros almost unanimously concluded that few, if any, major employers would leave the area as a result of the earthquake.

"I was born and raised here, and I haven't experienced anything this traumatic in my 47 years," said Jeff Resnick, president of Westside brokerage First Property Realty Corp. "But you look outside and it's 79 degrees while the Midwest and East Coast are going through a deep freeze. Businesses need and want to be here, and so do all the personal services -- doctors, lawyers, accountants. Where are they going to go?" he asked.

"The California dream has been buffeted a bit, but people tend to realize lightning usually strikes just once," added Mike Zugsmith, chairman of Encino-based brokerage Zugsmith-Thind Inc. "On the day after the quake, I cruised down Ventura Boulevard amid all the destruction and said to myself, 'Gee, I'm glad to be in sunny Southern California!'"

Even before the quake hit, improving national economic news hadn't generated encouraging fourth-quarter net leasing activity in L.A.'s primary commercial markets. In fact, among the 153 million-plus square feet of commercial space brokerage Grubb & Ellis Co. tracks in L.A. County, only three 50,000-foot-plus leases were inked during the entire fourth quarter.

The result, according to Grubb & Ellis computations, was countywide "negative net absorption" of 50,000 square feet during the quarter. In other words, the county's office tenants occupied that much less space on New Year's Eve than they did on Sept. 30, 1993.

For all of 1993, commercial properties countywide "absorbed" just over 700,000 square feet of space, according to Grubb & Ellis. Considering that the downtown L.A. market alone was absorbing significantly more than that amount each year during the late 1980s, the tally indicates that local markets have yet to demonstrate the rebound property pros have been eagerly anticipating.

"People are still moving so slowly, we're just not seeing the kind of progress on deals we've been expecting," lamented Greg Schultz, senior vice president at Metropolitan Structures West, developer of downtown L.A.'s big California Plaza mixed-use complex.

"Instead of seeing 300,000 feet (absorbed) during a quarter, we get 100,000, while negotiations continue on several major transactions," Schultz continued, referring primarily to the downtown L.A. highrise market. "So hopefully we'll see 400,000 feet absorbed during an upcoming quarter if several of the deals under discussion close."

Over on L.A.'s Westside, "the large blocks of vacant space are disappearing, and I think we'll see some deals with real impact close during the first and second quarters," predicted Mark Robinson, vice president with brokerage Leonard Nadler Associates Inc.

"The feeling among our clients is that things have hit rock bottom, that this is an opportune time to restructure leases and write new ones," Robinson explained. "The impression we're getting here and seeing at other Westside brokerages is that the worst is over now; I'd be surprised if we don't see an increase in absorption during the next two quarters."

As always, some of L.A.'s commercial submarkets posted better net absorption numbers than others during the fourth quarter -- and for all of 1993.

Downtown L.A. absorbed about 100,000 square feet during the quarter and ended the year with a 20 percent commercial vacancy rate, according to Grubb & Ellis projections. But downtown's already-strained supply-demand imbalance only intensified during the fourth quarter when IBM Corp. formally offered to sublease about 350,000 square feet of Wells Fargo Center space, legal giant Baker & McKenzie returned about 100,000 square feet to the 777 Tower's developers, and Taiwanese buyers threw the 330,000-square-foot 1100 Wilshire tower back into the competition for tenants.

Century City also showed relative strength during the quarter, absorbing just under 100,000 square feet to end the year with a vacancy rate below 15 percent. But the Grubb & Ellis projections indicated more bad news than good on the commercial space absorption front. The Mid-Wilshire area lost another 90,000-plus square feet of net occupancy during the quarter; Brentwood lost more than 50,000; Glendale and Pasadena collectively lost nearly 50,000.

For the year, Mid-Wilshire was also the big loser, posting about 380,000 square feet of negative net absorption, according to Grubb & Ellis estimates. Also during 1993, the LAX/Century Boulevard market lost 250,000 square feet of net occupancy, Glendale and Pasadena saw their collective tenant base shrink by more than 200,000 square feet, and Beverly Hills tenancy shrank by 150,000 square feet.

More encouraging 1993 absorption activity was recorded in downtown L.A., which posted 680,000 square feet of tenant growth. San Gabriel Valley commercial properties absorbed 280,000 square feet of space during the year, the central San Fernando Valley absorbed 275,000, and the Marina del Rey/Culver City submarket absorbed 150,000.

The year ended with office vacancies at 19.4 percent for the Central L.A. markets, which include downtown, the San Gabriel Valley, Glendale, Pasadena and Mid-Wilshire. The corresponding vacancy figure was 18.6 percent for the greater Westside, 14.5 percent for the San Fernando Valley and 22.2 percent for the greater South Bay.