Things may get worse before they get better.

by admin

Following trends in the domestic and global economy, conditions in the Los Angeles office market continued to deteriorate this summer. Los Angeles County’s unemployment rate reached 11.9 percent in July, up from 7.7 percent 1 year earlier, and the Bureau of Labor Statistics estimated that 172,100 non-farm jobs were lost between July 2008 and July 2009. Area companies have conceded to a difficult business environment and lower revenue forecasts by shedding employees in record numbers and, in turn, reducing their need for office space.

At mid-year, total vacancy was 14.7 percent, up from 12.5 percent at the end of last year. The market experienced negative net absorption of 3.3 million square feet through the first half of the year, and preliminary third quarter data indicates that vacancy continues to rise, albeit at a slower pace than has been witnessed during the past 18 months.

While previous real estate downturns in Los Angeles were triggered by excessive speculative office construction, the current rise in vacancy has stemmed from a collapse in demand. Construction has been relatively limited in the current cycle; however, a handful of large projects have been delivered this year, most notably The Pointe (480,000 square feet) and 2300 W. Empire Ave. (351,000 square feet) in Burbank; 207 Goode Ave. (188,000 square feet) in Glendale; and the Horizon at Playa Vista project (466,000 square feet) in Los Angeles. Availability in these projects is currently in excess of 70 percent. Falling rents along with high barriers to entry will discourage new development for some time to come.

Rental rates in Los Angeles’ office market reached a peak of $2.91 per square feet gross in mid-2008 and have been declining for the past year. At mid-year 2009, the average asking rate for direct space was $2.75 per square feet gross. Landlords have been slow to reduce asking rates, instead opting for generous concession packages. However, it appears that owners have finally succumbed to market realities and are lowering rents to attract and retain the limited number of tenants in the market.

General expectations of economic recovery have been pushed into 2010; as a result, vacancy is forecast to increase well into next year. A number of distressed assets are beginning to trade at a discount; new owners are purchasing these buildings at lower pro formas and will likely have more flexibility to reduce rental rates. According to industry data provider Reis, asking rents in the Los Angeles office market will fall by 9.5 percent and effective rents by 13.2 percent by the end of 2010.

— Michael Gold is a senior research analyst at UGL Equis in Los Angeles.

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