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Q1 CORPORATE REAL ESTATE TENANT’S GUIDE
By Dave Toomey, Principal, CRESA Partners
Los Angeles Overview
The class A office leasing market in Los Angeles showed further signs of slowing in the first quarter of 2008. Net absorption of class A product was a negative 1.1 million square feet, pushing the countywide vacancy rate to 10.2%. This is the first negative absorption since the fourth quarter of 2003 and the first time the class A vacancy rate has topped 10% since the fourth quarter of 2005. Quoted rents were up 13% from a year earlier, but up only 1.6% from the fourth quarter of 2007.
Leasing activity (as measured by total square footage leased) was less than 2.2 million square feet, well below the quarterly average of 3 million square feet during the previous 10 quarters.
Downtown Los Angeles experienced the highest percentage increase in quoted rents, up 5% from the previous quarter to $33.60. Westside quoted rents were $45.50, up 3.3% from the fourth quarter of 2007. The East Valley saw quoted rents fall to $35.20, a 2.8% decline. South Bay and the West Valley experienced no change.
Market Trends
New construction is having a softening effect, particularly in the South Bay, East Valley, and Lower Westside.
Westside tenants have shown a willingness to relocate from the top-tier buildings to lower-cost alternatives to avoid excessive rent increases.
The Lower Westside is emerging as a viable alternative for Westside tenants seeking cost-effective options.
Tenant's Perspective
Planning well in advance of a lease expiration remains the most effective strategy to allow tenants to identify viable alternatives, create negotiating leverage, and implement the most favorable solution.
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Orange County Overview
For the fourth consecutive quarter, vacancy rates have increased in Orange County from 11.2% in fourth quarter of 2007 to 12.5% in the first quarter of 2008. The increase can be attributed to the negative absorption of 1,201,923 square feet and the 46 class A and B office buildings delivered this quarter totaling 948,054 square feet.
Vacant sublease space increased to 1,783,296 square feet, up from 1,595,211 square feet from the previous quarter.
While class A projects reported the highest increase in sublease vacancy, class B projects reported a decrease in sublease vacancy.
Construction of 15 class A and B office buildings, totaling an additional 1,059,117 square feet, is scheduled for delivery throughout 2008.
Average rental rates for all available office space saw a decrease in the first quarter of 2008 of 1.3% to $30.82 per square foot, down from the fourth quarter of 2007 average of $31.24. The class A sector saw a decline in average rental rates from $35.07 in the fourth quarter of 2007 to $34.16 in the first quarter of 2008.
Market Trends
As the market shifts from pro-landlord to pro-tenant, the discrepancy between asking rates and fully negotiated rental rates continues to grow. With an additional million+ square feet of office product soon to hit the market, a continued fall in effective rental rates is expected through 2008.
With vacancy rates on the rise, tenant advisors will have the upper hand in negotiations. Properly handled negotiations will produce more concessions in the form of free rent, reduced parking fees, more generous tenant improvement allowances and relocation costs.
Tenant's Perspective
The first quarter market remained soft, especially for the class A office towers. Vacancy in the Irvine/ John Wayne airport area is hovering above 16%. Tenants willing to consider early renewals may benefit from favorable lease economics.
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CRESA Partners is a real estate service firm that represents tenants exclusively. Services are designed to help clients find the right space, negotiate the most favorable lease terms, and manage design/construction/move. Solutions are flexible, cost-effective, and provide a work environment that enhances recruiting and retention. CRESA Partners is a dominant player in the technology and media space. For more information, contact Dave Toomey, Principal,
CRESA Partners at dtoomey@cresapartners.com or visit www.cresapartners.com.
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