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Commercial Real Estate

Downtown L.A. Still a Deal

Despite a Recovery That Has Pushed Rents Higher, Space Is Priced Lower Than That of Other Big Cities

July 07, 1998|BOB HOWARD | SPECIAL TO THE TIMES

Businesses bemoaning the rising cost of office space in Southern California take note: Things could be worse. You could be renting space in San Francisco.

Or New York.

Or Washington.

Or any number of places where office rental rates keep climbing while the supply of available space dwindles.

"Downtown L.A. is still one of the best bargains, compared with all of the major cities," said Howard Sadowsky, an executive vice president in Los Angeles with Julien J. Studley Inc., a New York-based commercial real estate brokerage.

Despite a real estate recovery that has been pushing Los Angeles office rents steadily higher over the last several years, a just-completed Studley study shows downtown Los Angeles office owners are unable to demand the kind of rents that landlords get in comparable urban markets.

Premium office space in downtown L.A. rents for about $27 per square foot per year, according to the Studley study, compared with $46 in midtown New York, $40 in Washington and $39.50 in San Francisco.

Surveys by Studley and other brokerages show that cheaper downtown office space is available in other parts of the country, but not usually in cities that compare in size and status with L.A.

"Downtown L.A. is one of the few bargains in the whole country. There aren't many places where there is a lot of Class A space left," said Robert Bach, national director of market analysis for Grubb & Ellis Co.

Downtown L.A.'s distinction as a discount market, however, is a classic good-news-bad-news scenario. Whether the news is good or bad depends on whether you're a landlord or a tenant.

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The good news for office tenants is that they can rent top-quality space for relatively low rates.

The bad news is that downtown L.A. is lagging the rest of the region and the country, with lower rents and nearly 20% of its office space vacant, despite a protracted economic recovery and a real estate rebound that is several years old.

Contrasting downtown with Westside Los Angeles markets strikingly illustrates that lag.

"It's like a tale of two cities," Sadowsky said. Class A rents run nearly $8 per square foot per year higher in West Los Angeles than in downtown L.A. Westside rents average about $34.80, according to the Studley study, but some of the most expensive buildings, such as 100 Wilshire in Santa Monica and 1999 Avenue of the Stars in Century City, command rates of up to $40 per square foot.

Still, even the Westside rents can look budget-priced compared with rates in San Francisco and New York. And on the Westside there are still empty offices for rent.

"In San Francisco you can't find an inch of space," the Studley executive said. "Whenever some space does come on the market, there's a bidding war for it."

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Of course, the decision on where to rent space is not just a dollars-and-cents issue, or rents in comparable-quality buildings would probably be a lot more uniform throughout Southern California, said broker Stan Gerlach of CB Richard Ellis.

Some companies insist on being in West Los Angeles or the also-expensive Burbank Media District and wouldn't consider a downtown L.A. building no matter how grand its granite, Gerlach pointed out.

On the other hand, Gerlach added, "We are starting to see some companies take a look at downtown" because of its lower rates. For example, he said, the insurance brokerages Johnson & Higgins and Marsh & McLennan chose to remain downtown when they consolidated recently.

"They had some space in West Los Angeles too, but they knew it would be a lot easier to sublease the West L.A. space than the downtown space," Gerlach said.

Even as it lags the rest of the region and the country, downtown L.A. is an improving market, according to Sadowsky and other brokers. The steady rise in rental rates throughout Southern California and the rest of the country might suggest that rents are headed ever skyward, but Sadowsky said new construction could eventually save the day for rent-hike-weary tenants.

When new space is built, Sadowsky explained, it tends to keep a lid on rates because the new space brings supply and demand more into balance.

Relatively little new space has been built in U.S. downtowns in recent years, Sadowsky said, thanks to the overbuilding of the past and to the growth of suburban markets that compete for tenants. Now, however, "Some cities are actually starting to think of building new downtown space," he said.

Whether that will happen in downtown L.A. is one of the big questions to be answered in the coming years.

Sadowsky pointed out that the typical tenants in downtown L.A. buildings are title companies, brokerages, law firms and banks, none of which are growing at the rates of the entertainment and high-tech companies moving into Westside and suburban markets.

In addition, bank mergers have hindered downtown's comeback by dumping hundreds of thousands of square feet of space on the market.

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Bach, the Grubb & Ellis research chief, offers yet another perspective.

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