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LOS ANGELES-Office markets here and in other parts of Southern California are expected to see modest but uneven gains in 2001, as lower mortgage rates and generally steady demand offset weakness in the dot-com sector and an overall slowing in the economy.

To be sure, tech-heavy West Los Angeles and a few submarkets in Orange County will be hit the hardest by the ongoing shakeout in the Internet business. On the Westside alone, researchers at Julien J. Studley say downsizing dot-coms have recently put more than 500,000 sf of prime office space up for sublet, more than doubling the submarket’s record-low 3.4% vacancy factor reached earlier in the year.

Still, Westside brokers aren’t hitting the panic button. “For every dot-com that drops out of the market, there’s a law firm or financial-services provider or other tenant waiting to take its place,” Susan Goodman Byron, a vice president and broker in tenant-rep specialist CRESA’s West LA office, recently told GlobeSt.com. Even more non-tech tenants may be willing to expand or relocate on the pricey Westside if slackening demand from dot-com tenants ends the long string of double-digit rent increases the area has seen over the past several years.

Brokers are split about the 2001 prospects for Downtown LA, the county’s largest office market. Optimists say the CBD should see an influx of new tenants over the next several months, in part because its 24% vacancy factor has resulted in rents that are between 20% and 40% lower than most other LA-area markets. But other brokers say Downtown could go from bad to worse next year: “If rents in surrounding areas soften, it would make it a lot harder to justify renting Downtown,” says one prominent broker who makes deals all over LA county. “You can make a case for renting in Downtown if it will knock 40% off your rent payments. But if the savings would be only 10% or 20%, you’ll probably pick the Westside instead.”

LA’s South Bay office market should remain hot through 2001, nearly all analysts agree, as big space-users continue flocking to the area instead of renting on the pricey Westside about 20 minutes to the north. In the sprawling San Fernando Valley, forecasters at Colliers Seeley International say office rents should rise about 5% in 2001—roughly half the level of the last couple of years—as several new projects give prospective tenants more room to bargain for better lease terms.

Like some of their LA neighbors, owners in Orange County are also starting to feel the pain of the dot-com cutbacks. Strong demand from Internet firms helped to absorb much of the staggering 5.2 million sf of class A space that became available in OC this year, but researchers at Marcus & Millichap Real Estate Investment Brokerage Co. say it’s doubtful demand will be as strong for the additional 4.5 million sf expected to come online in 2001. “Overbuilding is a distinct possibility,” says John Przybyla, regional manager in Marcus & Millichap’s Newport Beach office.

San Diego may well be the Southland market to watch in 2001. While brokers and building owners in other parts of the state fret about fallout from the tech-wreck, San Diego’s economy—and thus much of its office market—is driven by companies in biotechnology, telecommunications and many other industries that still have plenty of room to grow.

The overall vacancy factor in San Diego County has dropped to about 5% today from nearly 10% a year ago, according to researchers at Grubb & Ellis. And while construction activity has recently picked up, most analysts say strong demand will continue and overbuilding isn’t a threat.

“San Diego isn’t as dependent on dot-coms as some of our neighbors are,” says David O’Rell, a Grubb & Ellis research analyst. “Tenants looking for space in 2001 will still face challenges, even with an increase in construction.”

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