Studies See Market Trending to Tenants

Cresa Partners, for example, notes that the class A office leasing market continued to soften in the third quarter, while NAI Capital sees "a marked softening in the conditions and both sales and leasing activity." Cushman & Wakefield, which publishes reports for each major geographic area within the region (north, west, south, etc.), finds conditions ranging from flat to weakening in those various areas.

Cushman & Wakefield sums up what's behind all of the change with the observation: "Like the rest of the nation, Los Angeles County continues to feel the effects of the weakening economy. With continued job losses in the construction (-6.2%) and financial sectors (-2.8%), the county lost 16,800 jobs in the last year (-0.4%)." Cresa Partners sums up the impact of all of these forces with the statement, "We are trending toward a tenant's market in which space occupiers will have more leverage in negotiations with landlords."

Cresa Partners pegs the class A vacancy rate at 10.5%, up from 10.2% in theprevious quarter, with net absorption for the first three quarters at a negative 1.1 million sf. Nonetheless, quoted rents "crept up from $35.30 to $35.50," Cresa says. The firm says it's possible that the office leasing market will not bottom out until 2010. "Tenants that can delay negotiations another four to six quarters should reap the benefits of the softer market," it concludes.

NAI Capital's report is based on a survey of its brokers, who generally expect that office market conditions will continue to soften into 2009 and effective rents will continue to drop (by 3.6%, on average). "Interest in future requirements is down significantly, particularly from firms in finance and in real-estate," the NAI report states. On the upside, it adds, construction starts are expected to drop significantly, enabling the market to tighten starting in approximately a year and a half.

In its studies of the various geographic regions within Greater L.A., Cushman & Wakefield finds that overall and direct vacancy rates ticked up in the third quarter in the North, South Bay and Tri-Cities (Glendale, Burbank and Pasadena) areas, with West Los Angeles remaining stable at 8.7%. West L.A.'s vacancy was actually down from 8.8% in the second quarter, but it was up from 7.4% in the third quarter of last year.

In general, leasing activity is slowing and overall rents are either flat or sliding in the North and Tri-Cities markets, but class A rents in some cases are stable, according to the C&W surveys. In the South Bay, rents even climbed, in part because—despite the uptick in vacancy in the South Bay—themarket continued to draw tenants from West Los Angeles who are looking for less expensive rents.

Despite the generally more positive performance of the West L.A. market, Cushman & Wakefield notes that much of the sublease space that could hit the market in the coming months is still occupied and therefore not yet reflected in its third-quarter data. "Some landlords have quietly dropped rents," its report says, but many of the published asking rates remain firm despite year-to-date overall absorption of negative 531,227 sf.

The company's forecast for the Los Angeles West market sees it as vulnerable to the financial and insurance crisis, but better positioned than it was during the dot.com fallout in 2001 and 2002. "While there are many more factors involved in this downturn, the Westside market is resilient and a desirable location and will recover from any continued decline in market fundamentals," the report says.

In its other forecasts, Cushman & Wakefield expects the Los Angeles North office market to weaken as a result of the crisis in the financial and insurance sectors, leaving large blocks of space available. "While the short-term outlook is bleak, long-term prospects remain positive as the market is home to an attractive employee base," the C&W report states. In the South Bay, it expects the ongoing economic uncertainty and decreased demand to leading thetrend away from a landlord's market. It foresees flat demand growth in 2009, but adds, "It is important to keep in mind that the South Bay market will continue to benefit from the favorable supply/demand equation and the long-term outlook remains positive."

Cushman & Wakefield describes the Tri-Cities market, particularly its Pasadena submarket, as "one of the most vulnerable in Los Angeles County" and especially hard-hit by the recent collapses in the financial and insurance sectors that have a large presence in that submarket. It notes that sales activity "dropped off completely in third quarter without recording a single sale, showing the weakness in the market.