The concept of a recession is much more real than it was in the fourth quarter, and economic jitters are having an effect on the commercial real estate market.
Overall, everyone is nervous. As a result of the economy,and more than at any time during the past five years,tenants are showing reluctance to pay high rents.
Cautious space users are exploring cost-effective options in secondary markets such as Downtown Los Angeles and the San Fernando Valley. Of note, law firms and the entertainment industry have yet to be impacted by current economic conditions. Despite tenant caution, rental rates are holding strong and landlords can continue to charge what they want. They are depending upon increased concession packages to enable them to maintain face-value rents.
Despite economic uncertainties, several notable building sales took place during the quarter. In March, Santa Monica-based Douglas Emmett Inc. acquired a 1.4 million-square-foot portfolio from Arden Realty Inc. The price was $610 million, or $428 per square foot. The portfolio, which is 88% full, comprises six buildings in West Los Angeles and the San Fernando Valley. It increases Douglas Emmett’s commercial real estate holdings by almost 12%, to approximately 13.2 million square feet in 54 buildings.
Also, Hines Real Estate Investment Trust purchased 2200 and 2230 E. Imperial Highway in El Segundo for $120 million, or $218 per square foot. The properties are 100% leased to Raytheon Co. and DirectTV Inc. The seller was an affiliate of Lexington Realty Trust. This acquisition also included a 10-story parking structure.
The region continues to see significant construction. The third and final phase of NoHo Commons broke ground in North Hollywood in March. The $79.4 million, mixed-use project is on a 3-acre site and will comprise a movie theatre, a restored Jazz Age diner and a 182,000-square-foot class A office building. The office part of the project will include retail and restaurant space. The first two phases of NoHo Commons, completed in 2006 and 2007, contain housing units and retail and commercial space. It is anticipated that NoHo Commons will play a key role in the revitalization of both North Hollywood and the San Fernando Valley.
Leasing Slower but Stable
Leasing activity has been on a roller-coaster ride in most markets around the country. Demand downshifted several quarters ago in Los Angeles, but has since stabilized. Leasing the past four quarters was at 12.6 million square feet.
On a quarterly comparison, overall monthly asking rent increased by 2.3%, rising from $2.70 to $2.76. The average national rate increased by 3% quarter-over-quarter. Class A rent in Los Angeles jumped by 3.3% for the quarter, from $2.97.
Overall rent was up by 12.8% year-over-year and class A rent jumped by 13.7%. Rents fell in a few scattered submarkets. Class A rent posted a 4.3% quarterly decline in Santa Monica but was still up by 6.1% from a year ago. Santa Monica still has the region’s highest average rent, but Beverly Hills/West Hollywood and Westwood/West L.A. moved closer to the top. These submarkets recorded annual rental rate gains of 21.7% and 29.4%. Not surprisingly, class B and C rents recorded the greatest annual increases in the highest-priced class A markets: Westwood (32.9%) and the Westside (20.6%). The average rent in the Westside ($3.09) is higher than the class A rate in all of the other submarkets except Miracle Mile.
Availability Rates Up
The overall availability rose for the fourth straight quarter, ticking up from 12.6% to 13.1%. The class A rate increased from 13.1% to 13.5%.
A mixture of construction, slowing demand and some sublet supply has caused the increase. Sublet supply increased from 3.8 million square feet a year ago to 4.8 million square feet at the end of the first quarter, but still represents a sliver of the overall availability for the market. Class A availability remains tight in the highly sought-after Westside and sits at 10.5%.The class A availability rate grew in Santa Monica to 14.6% and dropped to 4.7% in Hollywood. Class A availability increased for the quarter in Downtown Los Angeles to 13.9%, but, since tenants have focused on this submarket over the past four quarters, the rate fell by 4.5 percentage points year-over-year,the region’s largest yearly decline in class A availability.
In contrast, the West San Fernando Valley registered the largest spike (8.3 percentage points) in the class A availability rate over the past four quarters to 21.5%.
Hot Submarket
As businesses continue to seek lower-priced alternatives to Santa Monica and Beverly Hills, the lower Westside, which includes Playa Vista, Westchester and Culver City, is seeing a spike in activity. In Culver City, development is picking up in the Corporate Pointe office campus. IDS Real Estate Group recently unveiled plans for a $115 million, 227,607-square-foot office building on a 3.3-acre parcel with delivery slated for the second quarter of 2010.
In addition, Second Street Properties has proposed a smaller, 130,000-square-foot project at 9919 Jefferson Blvd. Playa Vista already has two buildings under way totaling about 450,000 square feet, which will deliver later this year. Lincoln has proposals for two additional buildings that would add another 300,000 square feet to the development. Also in Playa Vista, Maguire Properties Inc. has plans for a 161,977-square-foot building to be called Water’s Edge, with a planned construction start later this year.
Analysis by Studley Inc.
