L.A. Commercial Real Estate: No Signs of Life

It looks like the "fog a mirror" metaphor in the greater Los Angeles area has made a complete transition from its 2005 usage, when it referred to the requirements for getting a home loan, to today when it describes 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.

Comments

[battman:]

At this point I don't know why there would be any signs of life. As unemployment rises, it obviously has an impact on physical space tenants and manufacturers need. We also have more poeple working out of their homes, which reduces the space required by tenants.

Oct 19 08:10 AM

[Fabien Hug:]

In West San Fernando Valley, they try to rent a 3+2 single story family house for $ 2.500, since July. Still empty. Houses are selling well (public schools are very good in this area) at about $ 700.000 for a 4+2 1/2 two stories family house. Two years ago you would have gotten the rental above for that price. I still think it's very expensive but a couple active in teaching can easily make about $ 180.000 a year in LA. They can afford that without problems.

Oct 19 09:20 AM

[nathanredondo:]

I've heard several stories of falling rents. Several renters in our building (oceanside Redondo Beach 90277) were able to secure lower than the initial asking rent after the units were on the market for 3 months of more. Rents seem to have fallen about 8% or so (couple hundred bucks on a 2500/month rent). Over in Hermosa, my buddy's building (Playa Pacifica owned by EQR) didn't raise rates on existing tenants this year. Judging by how they have stepped up their advertising, my guess is they are seeing a drop in occupancy as well.

Oct 19 10:47 AM

[debtacid:]

I have 2 properties in LA South bay, a mile from the beach that have lost 30% of long standing tenants due to job loss. It takes a lot longer to get quality tenants now and I've had to drop the rental price 10% from what I was able to get 2 years ago. More than half the tenants who left didn't just leave the city, they left the state. Most of my rental property friends are in the same boat. I don't need any government charts to see whats happening in LA.

Oct 19 04:42 PM

[TeresaE:]

You would think with commercial credit evaporating, and thousands of current loans and mortgages going into re-finance daily, that rentals would be booming.

But they are not.

We have to start looking at the "whys" to this problem, not just running to put band-aids on symptoms.

Small business is being eradicated in this country, this is yet one more symptom of the underlying disease.

I'm glad everyone is so giddy about residential "hitting bottom" cause they will get a chance to feel this way again (as the new bottom is found).

Commercial vacancies only mean ONE thing, fewer jobs. Which will then cycle right back into increased residential foreclosures and more layoffs.

The good news is that due to government reporting criteria and procedures, the stated devastation can still equate to higher company stock values as is proven by recent history.

Oct 22 03:24 PM

[doubleguns:]

How many people are moving back with family. They don't need to rent for now. They need a job first.

Oct 22 03:29 PM

[Leftfield:]

Can't wait to see the real estate taxes go up at an even faster rate, state and local, as there are fewer solvent marks, I mean, targets, victims, you know, owners, to tax. So the teacher couple making $180,000 in LA, and close enough in many other areas, can be paid. (The cost of their top-tier medical and 30yr-and-out pensions brings that total MUCH higher).
As with everything now, it's all about political clout.

Oct 22 03:36 PM