The News: Corporate Cutbacks Bedevil Los Angeles Office Market

The 187 million-square-foot Los Angeles office market is not immune from the recessionary U.S. economy, as vacancy rates continue to inflate. Vacancy rates have continued to increase for four consecutive quarters and reached 11.4 percent by the end of the third quarter, according to a Grubb & Ellis Co. report.Sublease space has flooded the market. Residential real estate firms and mortgage companies are responsible for a good part of that space, but the report found that other companies, such as Amgen Inc. and Yahoo! Inc., are also putting space back on the market.The economic downturn carries with it some positives for tenants, according to Colliers International senior vice president Richard Schnell. “It presents a huge opportunity to tenants to renew their leases before rents accelerate again,” he said. Still, many tenants are playing it safe, he said. “Tenants are wondering what kind of financial situation they will be in a year from now and wondering if they will have to cut staff.”The downturn has adversely affected Downtown Los Angeles, the city’s most improved submarket, in the past year. The submarket, which hosts a large roster of financial and banking tenants, saw almost 300,000 square feet of negative absorption in the third quarter, which drove up vacancy by 100 basis points to 13.1 percent, the highest since the second quarter of 2007’s 13.5 percent.Some Southern California markets are, however, showing resilience. The San Gabriel Valley posted positive absorption figures in the third quarter as companies look for lower-priced alternatives to Downtown and Tri-Cities, the Grubb & Ellis report said. The latter, however, also showed strength, as absorption stayed positive and leasing activity proved strong among healthcare and entertainment-related firms.Grubb & Ellis predicts that both Downtown and Century City, which have concentrations of financial services tenants, will continue to face challenges, as sublease space continues to enter the scene.Schnell noted, however, that occupancy levels at Los Angeles office buildings are at their historic norm and that office development has been fairly muted in recent years. He believes that the market will improve as the economy begins to stabilize, which could occur in the first quarter of next year, as Barack Obama’s administration takes office.