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Office Rental Market Still Sliding


The Los Angeles regional office market continued to weaken during the third quarter as steadily rising vacancies and falling rents overshadowed a few signs of strength, such as growth in the defense industry.

Brokers complained about a lack of deal making as economic uncertainty leaves few tenants willing to expand and many companies cutting back on space. Other tenants have delayed renewing their leases because they have found that the longer they wait the more rates decline and other incentives--such as free rent--increase.

Even on the pricey and prestigious Westside, bargain hunters can find space at monthly rates far below $3 a square foot in high-profile neighborhoods such as Century City and Santa Monica, said Howard Sadowsky, vice chairman of real estate brokerage Julien J. Studley. "You didn't see that a year ago."

At the end of the July-September quarter, the vacancy rate in Los Angeles County and a small part of Ventura County stood at 17.23%, up from 14.83% a year ago, according to real estate services firm Insignia/ESG. The average monthly asking rent continued to edge downward to $2.21, about 5% less than the same quarter last year.

The deterioration in leasing and vacancy rates overshadowed a few promising signs. The completion of an additional 500,000 square feet of space during the third quarter did not have as big a negative effect as some had expected. In addition, though the pool of space available for lease continued to expand, it did so at a slower pace and could actually start to decline early next year, said Kevin Morrow, Western region research director for Insignia/ESG.

"That does foretell an improvement in the Los Angeles office market," he said.

But other real estate brokers said the office market, which has been on the decline for more than two years, still has a long way to go before it stages a recovery. That turnaround will come only once the economy begins to expand at a faster rate and companies add workers, brokers said.

"There is no inherent growth and there is no particularly strong industry sector," said broker Jerry Porter of Cresa Partners. "We have no demand right now, and [companies] are still downsizing and shedding space. I think it's going to get worse."

Landlords have become more desperate in recent months as they court the few tenants looking for space by offering increasingly generous leasing and move-in packages, said Bob Healey, a broker with CB Richard Ellis.

Some landlords have cut rents 15% this year, but tenants, for the most part, are not biting.

"Everyone is just hunkered down right now," Healey said.

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