Supply of Office Space Is Shrinking

Southern California’s office market tightened again in the first quarter as expanding companies pushed vacancy rates down and rents up, according to data released Thursday.

Los Angeles County’s vacancy rate fell to 11.5% from 14.1% a year ago, continuing a slide that started in early 2004, real estate brokerage Cushman & Wakefield reported. Average asking rents ticked up 9 cents to $2.14 per square foot per month. Orange County and the Inland Empire experienced similar shifts.

“The overall economy is continuing to grow and a lot of the growth is coming in sectors that are big users of office space,” said economist Jack Kyser of the Los Angeles County Economic Development Corp.

Among the growing white-collar businesses in Southern California are law, accounting, banking and management consulting, Kyser said. The expansions mean there are fewer rental options for companies planning a move than there were a year ago, especially for large firms.

“Bargains are still out there, but they’re getting harder and harder to find,” said Andrew Ratner of Cushman, which often represents landlords in real estate transactions.

The typical small-business tenant that uses less than 5,000 square feet still has many options, but companies that need more than 50,000 square feet will have “very limited” choices, said Jerry Porter of Cresa Partners, who represents tenants.

With the market tilting in landlords’ favor, rents are expected to continue to rise in most parts of L.A. County, and hikes in the most-desirable markets such as Santa Monica could be substantial over the next several months, Ratner said.

Average monthly asking rents in Santa Monica were the highest in the county at $3.61 per square foot last quarter, a 26% increase from a year ago. The vacancy rate fell to 4.6% from 7.5% a year ago.

That means landlords like Trizec Properties Inc. probably will be able to continue to raise rents and reduce such concessions as a period of free rent, said Trizec Vice President Patrick Lacey. Trizec will take title in May to several large Westside office buildings including Westwood Center, which it is purchasing from Arden Realty Inc. as part of a $1.6-billion deal.

“We bought into that market because we saw that’s where the growth is going to be,” Lacey said.

Tenants who can’t find or afford space on the Westside are expected to head for the South Bay, downtown Los Angeles and other less-expensive markets. Downtown’s vacancy rate fell to 14.6% from 16.3% in the first quarter and rents climbed 24 cents to $2.29. Other markets including Pasadena and the San Fernando Valley also tightened.

“We are going to be in a much stronger landlord market for the next 24 to 30 months until more space comes online,” Porter said.

Orange County saw its vacancy rate fall to 8.9% from 11.6% a year ago and rents climbed 22 cents to $2.17. That market probably will soften by early next year as several new office buildings are being built and a large portion of existing space, currently occupied by downsizing mortgage companies, comes on the market, Ratner said.

In Riverside and San Bernardino counties, where economic growth is booming, the vacancy rate fell to 12.3% from 17.4% a year ago and rents moved up 26 cents to $1.96.

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Sampling of vacancy rates, rents

*--* Vacancy Rent per Area rate sq. foot Long Beach 11.9% $1.86 North L.A. County 8.1% $2.13 Burbank-Glendale- Pasadena 8.5% $2.42 L.A.’s Westside 8.3% $2.74 L.A. Central Business District 14.6% $2.29 Inland Empire 12.3% $1.96 Orange County 8.9% $2.17

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Source: Cushman & Wakefield