Sublease space takes bigger role in tenant competition; never has so much sublease space clogged market.

The sublease market, once hardly a factor in the overall L.A. office market, is making life even tougher for landlords but easier for tenants in search of space.

The skyrocketing amount of sublease space in L.A. has created a situation in which tenant-starved landlords must now not only compete against other landlords, but they must also sometimes compete against their own tenants, who are offering sizable blocks of sublease space.

Two examples from downtown Los Angeles illustrate how important the sublease market has become:

* At Arco Plaza, two chunks of sublease space, measuring 100,000 square feet and 75,000 square feet, respectively, are competing against space offered by the landlord of the same building.

* State of California officials looking for 31,000 square feet of downtown L.A. office space to house a California Department of Transportation legal office say that, of the 20 proposals they are considering, 15 are sublease offers.

A certain amount of sublease space is always on the market, but local office brokers say it has never before competed so seriously with so-called "direct" space offered by landlords. Brokers say L.A.'s sublease market has grown even more aggressive in the past year, as tenants, realizing the leasing market isn't going to turn around soon, have tried to cut their losses.

The sublease glut is most pronounced in downtown L.A., where law and accounting firms that expanded furiously in the 1980s have now consolidated. But the increasing volume of sublease space also affects other markets throughout Southern California.

Brokers cite a number of reasons that the sublease market is driving down rents and creating even more competition for landlords already facing a glut of space and weak demand. Among those reasons are:

* Large blocks of sublease space are available for long periods of time, often 10 years or more, compared with the relatively small blocks of space and short lease terms that have traditionally been available in the sublease market.

* Landlords are often willing to release a tenant from the remainder of a lease during good times, knowing they can rent the space to a new tenant at higher rates. But landlords are loathe to release tenants from leases when rental rates are sinking.

* Tenants who are trying to unload space on the sublease market are actively marketing that space, sometimes devoting a staff member full-time to the task.

* Much of the available sublease space is premier office space already built to accommodate lawyers, accountants and other professionals.

* In some cases where large blocks of sublease space are available, the tenant marketing the space is offering to provide funds for tenant improvements -- a situation virtually unheard of in previous years.

* Tenants who have sublease space to market tended to hold out for higher rents in past years, figuring the market was going to turn and they could get more money for their space. Or they would hold onto the space for their own future expansion. Today, however, they are letting space go cheaply just to get out from it.

Surveys by brokerage firms show more than 2 million square feet of sublease space is now available in downtown L.A. According to Bert Dezzutti, senior associate with the downtown office of CB Commercial Real Estate Group, 960,000 square feet of that is space that was built to accommodate law firms.

Dezzutti represents the law firm Pillsbury, Madison & Sutro in its marketing of 100,000 square feet on four floors at Arco Plaza, which the law firm moved out of when it merged with Lillick & McHose and moved to Citicorp Plaza at 725 S. Figueroa St.

Dezzutti said the space is being offered at $15 per square foot per year, gross, for 10 years, approximately half the original rental rate. Sublease space at these bargain basement rates puts increasing pressure on landlords who must compete against it.

"It's very nicely improved space and we're only asking 50 cents on the dollar," Dezzutti said, adding that deals in which sublease space rents for half of the original lease rate are very common.

The space at Arco Plaza is just one of many blocks available at prime locations in downtown L.A., like the former Pacific Enterprises offices at First Interstate World Center. R. Todd Doney, a senior broker at Cushman Realty Corp., described the Pacific Enterprises sublease as "some of the most beautiful space in downtown L.A." and said it "competes very seriously with any direct space that's on the market."

Tom McDonald, a director at Cushman & Wakefield of California Inc., said the "very, very aggressive" sublease market is bringing tenants into downtown L.A. who otherwise would have considered the market too expensive. It's a simple supply-and-demand situation, said McDonald, explaining that demand has fallen off steadily at the same time supply has increased.

From about 1985 to 1992, the downtown L.A. tenant base increased by an average of more than 700,000 square feet per year, he said. But that pace has slowed a bit, with the downtown L.A. tenant base expanding by only about 300,000 square feet during the past seven quarters.

The aggressive marketing of sublease deals "makes it difficult for landlords, regardless of whether the sublease space they are competing against is in the same building or other buildings," McDonald said.

For those seeking space, however, subleases can be sublime.

"What a market!" exclaimed Geoff McLennan, a real estate officer with the California Department of General Services, when asked about the 31,000 square feet his department is seeking to house a Caltrans legal office.

McLennan and Lewis Dean, area manager for the state's Office of Real Estate & Design Services, both said that, of the 20 proposals they are considering, 15 are sublease deals and at least 12 already have tenant improvements designed for legal offices. The state wants a 10-year lease, and some of the deals offer up to 15 years, they said.

By comparison, most sublease spaces in local markets outside downtown L.A. are smaller and have shorter terms, but brokers say aggressive subleasing is also a factor in the other areas.

Debra Mautner, director of marketing for Lowe Enterprises Realty Services Inc., said she lost one deal to a sublease offer, but luckily, she isn't competing against any sublease space in the Beverly Hills building she markets at 9100 Wilshire Blvd.

"It (sublease space) is also making the landlords more aggressive," Mautner said.

In Century City, between 300,000 and 400,000 square feet of sublease space is on the market, "depending on how you define the market," said Gary Weiss, managing director at Julien J. Studley Inc.

Weiss said some of the sublease offices that are "beautifully built out" rent for as little as $12 a square foot per year, compared with up to $36 a foot for direct-lease space in some buildings.

Mike Zugsmith of Zugsmith-Thind Commercial Real Estate Services said sublease space has even become a factor in the San Fernando Valley, where leases are generally smaller and terms are usually shorter than five years.

"The market has definitely changed over the past few years," said Zugsmith. When the market was peaking about four years ago, Zugsmith said, landlords would release tenants from lease obligations. But "in a declining marketplace, landlords won't release the tenants," he said.