The Los Angeles office market in general has suffered far fewer layoffs than New York City and other more finance-related CBDs in terms of office jobs lost, according to a report by Milwaukee-based Robert W. Baird & Co., which points out that the payroll cuts in the financial services industry have not been distributed evenly throughout the country but have been concentrated in markets with high concentrations of financial services firms. In Southern California, that has meant a severe blow to the Orange County office market, where the once high-flying subprime mortgage firms like now-defunct New Century Financial Corp. once filled huge spaces that have since been vacated.
Nelson Rising, president and CEO of Los Angeles-based Maguire Properties, revisited the difference between the L.A. and Orange County office markets recently at the annual Nareit conference in San Diego. Rising pointed out that occupancy remains high in Downtown L.A.'s class A office space, which is not dependent on the types of firms that undermined the Orange County market. And in remarks recently during the L.A.-based REIT's earnings conference call, Rising pointed out that Maguire—which is the dominant owner of class A space in the L.A. CBD—feels "quite comfortable" with its position with respect to tenants in the financial services industry. Rising, noting that Maguire has fielded many questions regarding its potential exposure from tenants in the financial service and insurance industries, said that the REIT's three largest banking tenants are Wells Fargo with almost 400,000 square feet, Bank of America with 190,000 square feet and US Bank with 162,000 square feet. All of those tenants "have weathered the financial storm quite well," the Maguire CEO said.
How the job cuts in the financial services industry will ultimately affect building values, if they do, will be very "building-specific" and "dependent on all kinds of factors and issues," according to Robert Bach, chief economist and senior vice president with Grubb & Ellis Co. Bach tells GlobeSt.com that owners of buildings where layoffs occur start making calculations about how much space will be affected as soon as they learn that one of their buildings will be part of a targeted cutback.
Building owners typically first want to know when a lease is going to expire so that they know how long the space will be generating cash flow. "But even if the lease isn't going to expire soon, a company that is laying off workers could try to sublease the space," Bach points out. Since sublease space typically rents at a discount below direct space, the tenant who is subleasing it is effectively competing against the building owner.
Since the percentage of occupancy is one of the factors that affect the value of a building, large losses of office jobs can have an impact on sales prices, but again the impact is on a building-by-building basis, Bach explains. In today's market, determining whether layoffs have affected office building values is problematic because so few properties are trading. A recent report by New York City-based Real Capital Analytics shows that sales of office buildings in the US dipped to $13.4 billion in the third quarter, the lowest quarterly total since early 2004. "It is now likely that office property sales in all of 2008 will not even exceed the volumerecorded in just the first quarter of 2007," the Real Capital Analytics report said. Since one of the factors in establishing values is recent comparable sales, that plunge in sales could mean a shortage of comps—thus complicating the job of determining values and creating further uncertainty among buyers and sellers.
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