Recession, wave of new office space paints a gloomy outlook for commercial leasing.

Recession, wave of new office space paints a gloomy outlook for commercial leasing

The Southland's commercial leasing market will continue to languish in the second half of 1990, as more and more economists dare to utter that dreaded word: "recession."

Worse, at least in the short term, is the virtual tidal wave of new office space that's now beginning to splash ashore. The multi-million-square-foot onslaught of new space won't let up for at least another two years, and is expected to send the vacancy rates soaring.

Yes, Southland tenants are firmly in the driver's seat these days. And they will most likely remain there for at least another two years, maybe longer.

Southland landlords, on the other hand, are offering ever-more-generous lease rates and concessions to fill up their new buildings, or to fill vacancies left in their older buildings by tenants who jumped to the newer buildings.

Areas where average lease rates have dropped since last year include downtown Los Angeles (down 4.9 percent), Hollywood (down 13.2 percent), Burbank/Glendale (down 3.9 percent), Pasadena (down 2.3 percent), and the South Bay (down 4.7 percent), according to the latest statistics from Julien J. Studley Inc.

Leasing activity in the South Bay has been particularly weak due to severe cutbacks in aerospace, high-tech and other defense-related industries.

"Net absorption" there during the second quarter of 1990 was a negative 113,600 square feet. In other words, 113,600 square feet more office space became available during the quarter than was leased.

Overall vacancy is now about 18 percent in the South Bay, which includes El Segundo, LAX, Torrance, Long Beach, and all the small beach cities between LAX and Long Beach. That makes the South Bay one of the Southland's County's weakest markets.

On the up side, only about 850,000 square feet of new office space, or about 3 percent of the existing base, is scheduled to hit the South Bay market during the second half of 1990.

While most of the South Bay continues to struggle, the Long Beach submarket continues to be quite active.

Last January, two huge office projects were completed on its booming Ocean Boulevard corridor: the 1.15 million-square-foot World Trade Center and the 366,155-square-foot Shoreline Square.

And early next year, the $100 million, 436,000-square-foot Landmark Square office tower is scheduled to be completed.

These projects, while glitzier than any Long Beach has ever seen before, pale in comparison to what the city plans in the near future.

For example, McDonnell Douglas Corp. is planning to develop a $300 million office-hotel complex on its 2.5-acre parcel on the corner of Ocean Boulevard and Golden Shore. The so-called One Golden Shore project calls for twin 36-story office towers with a total of 1.3 million square feet, a 3,500-car parking structure and a 450-room luxury hotel.

In the second half of next year, a development partnership led by preservationist Wayne Ratkovich plans to break ground on the $1 billion Pike Project on 13.5 acres bounded by Ocean Boulevard, Pine Avenue, Seaside Way and Queens Way. The project calls for up to 1.7 million square feet of office space, 250,000 square feet of retail space, 500 hotel rooms and 1,000 residential units.

As if that weren't enough, The Walt Disney Co. in August unveiled plans for a $2 billion water-oriented theme park, Port Disney.

True, port-related business is increasing in Long Beach, and the new Metro Rail Blue Line helps accessibility, but most industry sources agree the flood of new space there will take a while to soak up.

Another area where new space is hitting the market faster than tenants are willing to lease it is downtown Los Angeles. More new office space is now under construction there than at any other time in history. And the completion of that space is expected to send downtown's vacancy rates sky high.

At the end of the second quarter, downtown Los Angeles' vacancy rate stood at a respectable 13.7 percent, a dramatic improvement from its 15.4 percent vacancy at the end of the first quarter.

But that respectable rate is poised to take off, as 2.6 million square feet of new office space hits the downtown market by year end, and another 2.1 million square feet hits the market next year.

Specifically, three skycrapers are slated for completion downtown before year end: 777 Tower, 865 S. Figueroa Street Building, and Sanwa Bank Plaza, formerly Figueroa at Wilshire.

Slated for completion next year in downtown Los Angeles are the 1.25 million-square-foot Gas Company Center, the 565,820-square-foot 550 S. Hope Building and the 307,500-square-foot Figueroa Plaza II.

Preleasing at these new buildings has been strong so far. More than 1 million square feet has been preleased in the three buildings slated for completion this year. And a total of about 950,000 square feet has been preleased in next year's three mega-projects.

But much of the preleasing activity is coming from tenants already in downtown. Hence, as the new buildings fill up, landlords of older downtown buildings can expect to find their going even tougher.

In Mid-Wilshire, traditionally known as the city's office backwater, office space continues to be tight.

No new office buildings have been built there since 1987, several buildings have been taken off the market for asbestos removal and fire sprinkler installation, and large blocks of space have been leased there recently by government agencies.

Mid-Wilshire's 9.9 percent vacancy rate at the end of the first quarter had edged up to 10.9 percent by the end of the second quarter. But that's still one of the lowest rates in the county.

The long-term potential of Mid-Wilshire continues to rest largely on the ultimate fate of the hotly contested Ambassador Hotel site and, to a lesser extent, on the completion of Metro Rail's second leg.

The Los Angeles Unified School District continues to doggedly pursue the hotel site for a much-needed high school. But most Mid-Wilshire property owners, as well as the Donald Trump-led partnership that owns the property, insist the site must be developed into a mixed-use commercial project.

How the Ambassador controversy is resolved will undoubtedly have a profound effect on Mid-Wilshire commercial property values, as well as future development and leasing activity in the area.

On the Westside, overall vacancy stood at 15.1 percent at the end of the second quarter. But that rate is expected to rise in the near future with 2.5 million square feet currently under construction, and 1.3 million square feet of that scheduled for completion by year end.

An additional 7.1 million square feet has been approved for construction on the Westside.

Despite the flood of new space, Westside lease rates have continued to soar since last year. The average lease rate in Westwood is up 14.8 percent, Santa Monica is up 9.0 percent, and Century City is up 15.4 percent.

Century City's average annual lease rate jump to $33.46 a square foot has put it ahead of Beverly Hills as the county's most expensive office locale.

The jump is largely due to the recent completion of JMB/Urban Development Co.'s glitzy new 1999 Avenue of the Stars skyscraper.

The sky-high Century City lease rates are not expected to come down soon, either, since no new Century City office towers are planned for the near future.

However, tenants dead set on relocating to Century City might be happy to know that about 532,000 square feet of sublease space is still available there, and the sublease space is price about 20 percent cheaper than the direct-lease space.

Beverly Hills' vacancy rate swelled from 12.8 percent to 16.5 percent during the second quarter, due largely to now-defunct Drexel Burnham Lambert vacating 200,000 square feet.

The San Fernando and Conejo valleys continue to do well, with a total of 2.32 million square feet leased there during the first six months of 1990.

Major developments in that market include: launching of the 41-acre Burbank City Center project, city approval of the $2 billion Porter Ranch project north of Chatsworth, significant movement toward approval of the development-limiting Ventura Boulevard Specific Plan, Lockheed Corp.'s decision to sell its 325-acre property in Burbank, and Raffi Cohen Industries' plan to transform the 40-acre Stroh's Brewery site in Van Nuys into a 1 million-square-foot business park.