Monday, October 19, 2009

Office Market: High Vacancies in SoCal; Lease Rates Down 47% in Universal City; Tenants Have Upperhand in Landlord Negotiations

(chart from Los Angeles Times)

No matter how the news is spun, the fundamentals of the Southern California office market are awful: firms have downsized, profits have all but disappeared, and businesses' motivation to expand or move is almost nil.

The office vacancy in the five-county region has risen from 13% to 17% in the past year -- 51 million sq ft of space is currently unleased. Even the primest markets have not been spared: office vacancies in Santa Monica rose from 10% one year ago to 15.4% last quarter.
The exodus from office buildings that started in late 2007 accelerated during the third quarter as the anemic business climate took its toll on the real estate rental industry, according to the Cushman & Wakefield real estate brokerage.

"These vacancies are a direct reflection on unemployment... Companies continue to reduce their workforce, or they are not hiring."

Troubled business owners facing expiring leases often choose to downsize these days and take less office space, even though rents are falling. [Los Angeles Times]
And rents are dropping. Rents in the Universal tower in Universal City, the tallest building in the San Fernando Valley, had been as high as $4.50/sq ft. After the property was taken over by the lender through foreclosure, new leases are being negotiated in the range of $2.40/sq ft -- a 47% reduction from the original levels.

Jobs are the panacea to the office market -- you need bodies to fill those cubes. Some stimulus-related businesses might pick up some slack (loan servicing companies to deal with foreclosure-short-sales-loan mods?), but hiring prospects for most firms are bleak. Recovery and absorption of the excess inventory could take years.