Monday, October 19, 2009

Los Angeles Commercial Real Estate Struggling

Although the Los Angeles residential real estate market may be starting to show some preliminary signs of life, economic experts say that the commercial real estate market continues to remain stagnant. Despite the innovative tactics that commercial landlords are employing to retain existing tenants and attract new tenants, experts predict that Los Angeles will remain a “tenants’ market” until the job market and business climate begin to show more significant signs of improvement. See the following from The Mess That Greenspan Made for more.

It looks like the "fog a mirror" metaphor in the greater Los Angeles area has made a complete transition from its 2005 usage, reflecting the requirements for getting a home loan, to the absence of fog today to describe the lifelessness in commercial real estate.

At least according to Jack Kyser, of the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp., who, in this LA Times story noted:

It looks like residential may be starting to breathe again, but when you put a mirror under the nose of commercial, there is no sign of life.
Rents for office space are falling in Southern California and Riverside and San Bernardino, ground zero for the residential housing bust, seem to be hardest hit.

Reports of lower rents along with concessions and perks are widespread as the average vacancy rate rose above 17 percent during the third quarter, up from 13 percent a year ago.

Some of the things that landlords are doing to keep tenants are quite interesting:

Loath to set lower rent benchmarks because they reduce a building's value, landlords look for other ways to cut tenants' costs and perhaps stroke their egos.

Want us to wrap the building in a giant nylon "supergraphic" announcing your arrival for a few months? We'll make it happen, some landlords say. Want us to promise we'll never put an advertising supergraphic on the building because you think they're tacky? Glad to, other landlords respond.

Most landlords and tenants agree not to talk about the terms of their leases to preserve their financial secrets, but tenant broker Jonathan Larsen of Transwestern confirmed that he recently negotiated a promotional supergraphic for a new tenant in the South Bay.

Larsen has also been exploring new fronts for what might be called "naming rights," similar to university facilities named after donors or parts of entertainment venues named after paying sponsors, such as Club Nokia at LA Live.

Putting the largest tenant's name at the top of a building has long been an established practice for landlords who want to fill large blocks of space. The former Library Tower in downtown Los Angeles, the tallest building in the West at 72 stories, has been renamed twice, first as First Interstate World Center and now as US Bank Tower.

Larsen is taking a further step for smaller tenants that don't rate building-top signage by asking for other parts of the property to be named after the tenants. An outdoor garden area might get a sign proclaiming it the Acme Insurance Courtyard, for instance. Larsen is negotiating such a deal now, he said, but can't reveal the names of the parties yet.
Another LA Times story details the same situation from the perspective of the renter.

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," said Joe Vargas, an executive vice president at Cushman & Wakefield. "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, he said.

Real estate rentals are a lagging indicator of the economy, so the shrinking-space trend is expected to persist well into next year even if the nation's financial outlook continues to improve.
Cushman & Wakefield's Vargas predicts Southern California will remain a tenant's market through mid-2010 and perhaps longer if employment doesn't start picking up.

"This is certainly the worst downturn we've seen," Vargas said. "We're not going to see real improvement until job growth occurs."

Any word on residential rents in Southern California?

They've got to be dropping too, at least in areas that were way overbuilt during the boom.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

No comments: