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Collapse of 2 of City's Largest Firms Leaves Glut of Vacant Office Space : Leasing: Despite marketing effort and lower rents, experts are not confident 1 million square feet of empty offices will be leased soon.

Recession on the Westside: A Special Report


Months before signs of the recession began blighting the economic landscape, Beverly Hills was already reeling from the unexpected fall of two of the town's biggest businesses.

The financial roller coaster ride that saw Drexel Burnham Lambert and Columbia Savings & Loan plunge into insolvency with the crash of the junk-bond market and the S & L industry hit the city with a shot that it has yet to recover from.

The city's hotels immediately felt the loss as the free-spending clients of Drexel's junk-bond king Michael Milken no longer came to town. But the crash's most visible sign was the 300,000 square feet of commercial office space, once occupied by the two firms, that was suddenly dumped on the market.

"The (fall) of those companies just had a tremendous effect because it filtered through every facet of the city," said Ed Brown, a former mayor and president of the Beverly Hills Chamber of Commerce. "If the city can't rent up that space, then the city doesn't get its business license fees. The retail stores lose money because those employees are no longer spending in town. And then you have an economic situation where there's not many firms looking for new space. So there was a substantial downturn at every level."

The problem is compounded because some of the vacant commercial space was built according to the free-spending whims of former Columbia Chairman Thomas Spiegel. The lavish headquarters featured anti-terrorist bomb shelters in bathrooms and stainless steel floors--amenities that have made it difficult for commercial brokers to market--especially in an extended belt-tightening period.

Due in part to the fall of the houses of Milken and Spiegel, the citywide vacancy rate for commercial space has hovered near 25% for more than a year. The most recent survey found the rate at 21%, which means that more than 1 million square feet of space remains unoccupied.

The city had one more stroke of bad luck when former MGM/UA head Kirk Kerkorian built a 110,000-square-foot headquarters building but sold the company before it was completed. The Wilshire Boulevard building is finished, but almost empty.

So even though the city has begun an extensive marketing campaign to attract new high-end businesses, and developers have begun lowering their rental rates to fill the space, experts say that the immediate future does not look bright.

"The businesses who want to be in Beverly Hills will continue to locate there, but you're not going to increase the absorption rate very much," said David C. Lachoff, senior marketing consultant with Grubb & Ellis, the big commercial real estate firm.

City officials, led by Brown and then-Mayor Allan Alexander, went on a trade mission to the Far East in January in hopes of attracting corporate tenants. Business leaders have begun promoting the city as a corporate center to attract big-name firms and Mayor Vicki Reynolds is putting together a task force to tackle the commercial vacancy problem.

Virgin Records recently signed a deal to lease city-owned space, and entertainment mogul David Geffen is negotiating to build his headquarters there. They would be joining the likes of the powerhouse Creative Artists Agency and the William Morris Agency.

But to the dismay of city officials, media tycoon Ted Turner recently spurned the city's offer to build a West Coast headquarters in town, opting instead for a Century City high-rise office that he reportedly got for as low as $1.50 per square foot, far below the average cost of $2 to $3 per square foot in Beverly Hills.

Now that the office space glut has clearly become regional, rental rates have softened everywhere, and Beverly Hills developers are hard-pressed to match the cheaper lease terms available in Century City and West Los Angeles.

Commercial analysts add that Beverly Hills' reputation for opulence is a mixed blessing during a recession. Some companies will still aspire to locate there because of the cachet; others that wish to project a leaner image will be turned off.

Brown said major changes must be made if the city hopes to attract big-name companies and fill the vacant office space. He said it is hard for the city to compete because of its tax on office leases and a proposed gross receipts tax on businesses.

"We've definitely become more aggressive in marketing because we need to let people know that we offer competitive rates," Brown said. "But right now we're in the same boat with a lot of places because there's just been a tremendous increase in the amount of vacant commercial space. So everybody's making deals. It's a never-ending battle."

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