Tech Tenants Jockey Wildly For Offices.

If the tech sector seems volatile on Wall Street, it's equally wild on Main Street.

Tech companies across L.A. are rushing into office leases, unable to accurately project their real estate needs and fearful that the space may not be available if they delay -- only to find they've miscalculated. Most are taking too little space, while for a few, it's too much.

The result is a sublease market the likes of which few real estate brokers have ever seen.

"It used to be real estate was a really slow, steady business, where people were locked in for long terms. You have a new economy moving at a quicker pace, so you're going to have radical swings up and down, and that's being reflected in the real estate as well," said Jun Jacobsen, a partner at Lee & Associates.

Of course, the situation isn't unique to dot-coms; companies in a variety of industries are finding themselves with sublease space as the economy grows increasingly volatile, brokers say.

"Tenants in the market who need space don't have a lot of time to think decisions through," said Rick Pearson, vice president with brokerage Cresa Partners. "You're going to see more of this happening."

It does, however, seem to be more common among technology companies. And the phenomenon is creating highly unusual deals, such as a sub-sub-sublease agreement at the Santa Monica Business Park.

In a labyrinthine chain of events, L.A. Gear leased space at the complex a few years ago, then sublet it to CyberMedia, which was acquired by Network Associates. So CyberMedia subleased the space to USWeb Corp., which then moved to subleased space from Candle Corp. at the Water Garden and in turn sublet its old space in the Santa Monica Business Park to eToys Inc. (making it the sub-sub-sublessee).

So what will happen when eToys moves to its new digs in the Westside Media Center, which is now under construction? Two years remain on the Santa Monica lease -- an eternity in e-time.

"That's enough that we could do it a few more times," said eToys' broker, Matthew Miller of Cresa Partners.

But with eToys' stock price sagging badly, there's already speculation that maybe it won't move after all.

"That's another one that everyone's all over," said a broker who asked not to be named. Indeed, Miller said he has been getting at least one inquiry a day from parties interested in eToys' existing or future offices, but none of it is available for sublease.

Landlords enjoying the activity

Normally, subleasing drags down the real estate market, creating a glut of space at bargain-basement prices. But these are not normal times.

With Santa Monica's vacancy rate below 2 percent and huge demand for turnkey space on the Westside, tenants are playing a game of musical chairs.

But more often than not, tenants are opting to pay a fee to their landlords to get out of their leases, rather than deal with the hassle and liability of subleasing the space on their own.

And in cases where a tenant's lease rate is below current market rates, the landlord may let the tenant out of its lease without any penalty, or may even pay them to move. That's because, in the hot Westside markets, landlords know they can jack up rates once these tenants leave. Some brokers liken the current climate to an auction mentality.

"In highly desirable areas with cool build-outs, the landlord will be only too pleased to see them go,." said Ian Strano, a senior vice president at First Property Realty Corp., who represents developer Frederick Smith's Conjunctive Points project in Culver City. "There's such a strong demand for the space, if a deal dies, we can replace it with another tenant within hours."

Indeed, the minute there's so much as a rumor that a company might vacate its offices and move to bigger digs, the offers start pouring in.

Demand for space in ready-to-move-in condition is even greater than raw space.

"People are prepared to pay a premium for space that's built out because the need to get up and running surpasses the value of the real estate," Pellerito said.

Take GeoCities' former 24,000-square-foot offices at the Marina Business Center. After GeoCities was acquired by Yahoo Inc., its space came up for sublease, but was recaptured by landlord Spieker Properties. Broadband Sports was prepared to pay a premium for the space, with its board members even calling Yahoo's board. In the end, Spieker made a deal with InternetConnect.

But now the space may become available again, because InternetConnect has already outgrown the space since moving in last September. A couple of weeks ago, it inked a deal for 240,000 square feet in Torrance, space that had been vacated by Epson America inc.

CarsDirect.com apparently also went after the Torrance space, sparking a feeding frenzy for that company's still-new Culver City offices.

"The sharks are circling the water," Pellerito said.

Dynamic market

The reasons for the increase in subleasing are varied. In some cases, mergers or acquisitions changed a company's strategy or expansion plans, while others simply miscalculated their growth rate and ended up with more space than they need.

"It's a very dynamic time now as regards commercial leasing, and a lot of companies are biting off more than they can chew," said Brian Davies, a broker with Cresa.

But it's more common for companies to underestimate their needs. For example, a couple of months ago, advertising firm Wong Doody planned to expand from 4,000 square feet to 15,000 square feet at 2800 Olympic Blvd. But the firm was growing so fast that it ended up signing a deal in West Hollywood for 20,000 square feet, while Launch.com took the space on Olympic. A record company. had moved into the West Hollywood space only months before, but outgrew it.

As this all unfolded, the rent on Wong Doody's original space jumped by a quarter a square foot, per month.

A similar scenario just transpired at one of Smith's converted warehouse buildings on La Cienega Boulevard in Culver City. An Internet company signed a 20,000-square-foot lease seven months ago but backed out 30 days later, paying a penalty. Icebox.com just leased the space last week, but in the intervening seven months, the going price jumped by 35 percent.

"Landlords are holding an option -- who's prepared to pay more?" Pellerito said. "The tenant wants the liability erased and the landlord wants 25 percent more."

The Westside scenario is the reverse of what has been happening downtown, where 900,000 square feet of sublease space has been languishing on the market in the wake of major corporate mergers and acquisitions. Such a glut of sublease space tends to hold down rents and makes it difficult for landlords to fill up space that's available for direct lease.

But Westside landlords have lately been insisting up front on recapturing the space in the event a tenant wants to leave.

Strano said he and Smith have even instituted a new policy of assessing damages to tenants who don't go forward with their deals when they reach a certain point. Such a provision, designed to weed out the flaky deals, previously only applied to sales transactions. "The marketplace is so strong, the landlord can demand what he wants," Strano said.

Despite the potential rewards, landlords do occasionally balk at releasing tenants from their leases when the potential replacement isn't creditworthy.

"We're looking at the finances of the sub-lessee and the underlying lessee," said Tom Herta, vice president at Spieker. "We've become very careful. We've had to say no a few times to people we didn't think had viable (finances). It makes us nervous."