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L.A. County's office vacancy rate falls to 9.2% as businesses expand gradually

With buildings filling up, rents increase 14% in the second quarter.

July 26, 2007|Roger Vincent | Times Staff Writer

Office vacancies in Los Angeles County continued to shrink during the second quarter as white-collar businesses expanded at a slow, steady rate, according to data released Wednesday.

Businesses are beefing up gradually because "the economy has been good but not great," said Joe Vargas of Cushman & Wakefield, the real estate brokerage that compiled the data. "It all speaks to a very healthy office market."

The county's overall vacancy rate was 9.2% in the second quarter, down from 11% a year earlier. Average asking rents rose 14% to $2.53 per square foot per month.

But rents were substantially higher in certain sought-after markets such as Santa Monica and Westwood, where they exceeded $4.32 per square foot.

Rent increases, especially on the Westside, are going to get even steeper for at least the rest of the year, Vargas predicted. With buildings filling up and little new office construction underway, landlords will take the opportunity to boost rates.

"It's a good time to be a building owner," Vargas said.

Historically, it has been common for developers to start putting up new buildings when vacancy falls below 10%, but construction costs have climbed a great deal in recent years.

Although rents are rising, they are not high enough in most parts of Southern California to justify the cost of new buildings, Vargas said.

Also driving up rents is the recent consolidation in ownership of office buildings, he said. Among the largest landlords are New York investment firm Blackstone Group and General Electric Co., which spent billions of dollars acquiring office buildings in the last year.

These firms and other new owners who paid top prices for office buildings raised rents to help pay for their investments.

Rents on the Westside increased before and after Blackstone bought Equity Office Properties Trust and its real estate portfolio for $23 billion this year, said Mark Sullivan, regional manger in the Los Angeles office of real estate brokerage Studley.

One result of the increase that started in late 2006 has been a decline in the number of leases being signed, Sullivan said. "Activity has been cut in half."

Many tenants are resisting the higher rents. "The deals being done are done out of necessity," Sullivan said. For example, a law firm that added more attorneys would have to bite the bullet and pay for more office space.

Westside landlords are so far holding to their new higher rent demands, Sullivan said, but they may be forced to blink if large tenants start to leave the area in favor of cheaper districts such as the South Bay, Wilshire Center and downtown Los Angeles.

"Then we will know where the true line in the sand is," Sullivan said.

Downtown L.A., the second-largest office market after the Westside, saw a modest improvement for landlords as vacancy fell from 16.3% a year earlier to 15.5% and rents climbed from $2.41 per square foot to $2.65.

Some of the greatest office rental bargains in the second quarter were in the area around Los Angeles International Airport, where vacancy rose slightly to 33.5% and average rent fell 3 cents to $1.42 a square foot.



Higher rents

Average asking monthly rent for L.A. County office space per square foot, end-of-year data and latest

'95: $1.64

'07 (2nd quarter): $2.53


Sampling of vacancy rates, rents in second quarter

*--* Vacancy Rent per Market rate sq. foot L.A. Central Business District 15.5% $2.65 Inland Empire 8.8 2.04 L.A.'s Westside 6.9 3.53 Long Beach 6.7 2.06 Burbank-Glendale- Pasadena 5.7 3.03 North L.A. County 5.3 2.39 L.A. County overall 9.2 2.53



Source: Cushman & Wakefield

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