He says that's because exiting dot-coms are dumping sublet space back on the market, creating increased competition for building owners. Buckley notes that the turn in the market has pushed the actual vacancy rate from 7.2% to 9.95%, when sublet space is added to the equation.

According to Buckley, one million sf of space is currently available on the Westside, which includes Santa Monica, West Los Angeles and Venice. The good news, he says is that "this is a bonus for tenants looking in the market today, because there's more alternatives to choose from." Additionally, space formerly occupied by dot-coms is creative space--exposed ceilings and concrete floors--and most current market activity involves professionals looking for built-out office space. "These are 'real tenants' that are credit worthy," Buckley adds, "the type any landlord would be happy to have."

As for the future, Buckley says, "We're taking a wait and see attitude. What owners were smart enough to do was secure leases with letters of credit, so they're not necessarily suffering from this right now. But if market conditions persist and tenants burn through their letters of credit," he adds, "then you'll see a lot of owners burn."

In Phoenix it's not the dot-coms that worry building owners, according to Jay Butler, director of the Arizona Real Estate Center at Arizona State University, who notes, "We don't have a lot of dot-coms."

However, he says that several major high-tech companies have recently announced cutbacks and layoffs, which is causing much concern about future rental and vacancy rates. "We're still seeing a lot of building and expansion, and it's not clear how all this will shake out," he says. "The numbers don't show anything yet, and we won't see any change for the next few month."

The biggest concerns, Butler notes, are whether or not anticipated rental rates for buildings under construction will be valid and that tenants who had agreed to take space in them will still be there to move in when they're completed. "We don't know; we can't track this."

Instant Insights /

Sublets by Exiting Dot-Coms Having Trickle-Down Effect on Rents and Vacancy Rates

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