Westside’s Office Rent Market Sets Pace in L.A. Basin

Despite a glut of office space regionally and nationwide, the Westside is “the strongest office market in the entire Los Angeles basin” with a vacancy rate of 15%, according to a year-end report released Wednesday by a major real estate company.

The Westside’s vacancy rate is lower than any other area in Southern California, including Los Angeles (18%), the San Fernando Valley (20%) and the South Bay (20%), according to figures presented by Grubb & Ellis Commercial Brokerage Co. at its annual real estate conference at the Sheraton Grande in Los Angeles.

Good Supply of Complexes

About 4 million square feet of office space is vacant in the Westside out of a total of 26.9 million, the company reported.

Although 85% of the Westside’s office space is occupied, analysts said, commercial tenants have a good supply of office complexes to choose from. As a result, businesses may be able to secure rent concessions and above-standard improvements in their leases, they said.

There has been “phenomenal” demand for prime office space on the Westside in the past year, according to Grubb & Ellis.

Companies from throughout the country are moving to the Westside because it is a prestige business location that has a good climate and ready access to executive housing, analysts said.

The Westside has seen considerable office development in the past two years, partly because builders anticipate increasing governmental restrictions to hamper future development, according to sources at Grubb & Ellis and those attending another real estate conference Monday at the UCLA Graduate School of Management.

A Westside office building boom has taken place in the last few years even though there has not been enough immediate demand to absorb the additional space, said Irwin Daniels, a development company executive who spoke at UCLA.

Fear of Downzoning

Daniels said that developers built offices because financing was available and because “of a fear of downzoning or of restrictions from the Coastal Commission.”

The Westside “already feels pressure from civic groups and city and county councils to place development restrictions on density,” agreed Timothy C. Macker, senior marketing consultant with Grubb & Ellis. “As a result, land prices and lease rates may go up.”

The supply of available offices enables tenants to be choosy, speakers at the two conferences said.

A building that is “just another glass box” will have more trouble finding tenants than a building with special amenities or design features, Daniels said at UCLA. Low-rise garden office projects are popular among tenants, he said.

Analysts for Grubb & Ellis found that vacancy rates varied among seven sub-markets they identified in the Westside:

- Santa Monica has a vacancy rate of 10%, well below the 17% to 18% in the adjacent areas of Marina del Rey and West Los Angeles, they said.

“The Santa Monica sub-market has preserved its desirability by limiting available supply,” according to the company, which forecast the vacancy rate falling below 10% by year-end.

Company analysts said that they expect that “the Santa Monica City Council will begin to soften its traditionally Spartan anti-development stance, allowing for more development.”

- Beverly Hills also has a relatively low vacancy rate of 11% and is described as “a tight office marketplace.”

“The benefit of a Beverly Hills address is so great that tenants seek out space in this traditional landlord’s market and pay higher rents for longer periods in order to obtain it,” analysts said. City restrictions on new development, including a three-story height limit, have contributed to the limited supply of offices in Beverly Hills, they said.

- The West Los Angeles area, including Westwood and Brentwood, has been marked by a flurry of development in the past two years and is “the most dynamic” sub-market of the Westside, analysts said. As evidence of the high level of activity here, 967,000 square feet of Westside office space was leased in 1985, the most of any sub-market in the Westside. In the Los Angeles basin, the Westside is second only to the El Segundo-Manhattan Beach sub-market.

Many Influences

“Several factors drive this market--proximity of good executive housing, excellent freeway access and state-of-the-art development,” the report said.

“Simultaneously, the lack of these features in Century City and Miracle Mile/Park Mile districts is spurring movement into newer (offices) in West Los Angeles.”

- The Marina area, including Culver City, “will be the main area of growth in the Westside market,” Macker said in the Grubb & Ellis report. This sub-market, with a 17% vacancy rate, has land available for development and several projects are under way that will attract tenants, he said.

- Century City, which represents one-fourth of the Westside’s total office space, has a vacancy rate of 12% with 829,000 square feet out of 6.6 million unoccupied.

Century City has been a desirable location for professional firms and service tenants, but its ability to attract businesses is being affected by “traffic congestion, excessive parking costs and poor freeway proximity,” according to Grubb & Ellis.

- Hollywood and West Hollywood, with a 16% vacancy rate, represent a self-contained office market with a steady source of tenants from the entertainment industry, analysts said.

- The Miracle Mile area is suffering from the loss of advertising and insurance agencies that traditionally have located here, and the vacancy rate is 20%, the highest in the Westside, analysts said. “Poor freeway access and limited new development have made this area less desirable,” they said.

More Selective

In addition to the discussions on office development, speakers at the UCLA conference reviewed the status of other property in the Westside:

Regarding apartment ownership, real estate investor Norman Jacobson said that buyers are expected to be more selective this year than they were in 1985, when many rushed into the market in anticipation of possible changes in the federal tax laws that would decrease the benefits of investment. “There was too much money chasing too few properties,” he said.

“Opportunities to purchase new apartment complexes at favorable prices will abound,” he said of the apartment market statewide. Prices in the Westside are higher than elsewhere in California, but they appeal to certain buyers who know the strong economic base of the area, he said.

On industrial property, real estate executive Allan K. Jonas said that about 10 years ago the market pushed for conversion of warehouse and manufacturing plants into other uses. But because such Westside properties were originally developed under old parking codes, they did not allow for enough parking for new uses such as research and development; consequently, he said, research and development companies found locations in the South Bay which were large enough to provide parking for employees.

The remaining industrial and manufacturing companies in the Westside are fairly small with facilities of 5,000 to 10,000 square feet, Jonas said. But because land here is so costly there is pressure to convert these properties to uses that pay higher rents, such as offices, he said.