April 17, 2011|By Roger Vincent, Los Angeles Times
After three years of decline in the office leasing business, the worst is over, landlords and brokers said.
Companies that hunkered down during the economic slump may not be doing much hiring yet, but many were confident enough about their futures to sign office leases in the first quarter, brokers said. In addition, attractive rental terms spurred deals across Southern California.
“The general feeling is that we have arrived at a plateau and things have become more predictable,” said broker Mark Sullivan of Studley. “And when things are predictable, you tend to see more activity.”
More than 5.5 million square feet worth of leases were signed in the first quarter, a 37% increase from the same period in 2010, according to a report by brokerage Cushman & Wakefield.
That still wasn’t enough to end the long slide in occupancy, however, as overall vacancy in Los Angeles, Orange, Riverside and San Bernardino counties rose to 19.5% from 18.9% a year ago.
Rents also continued down as landlords cozied up to tenants in a competitive marketplace. Average asking rents were $2.31 per square foot per month, a 9 cent drop from last year’s first quarter.
“We are very much in a tenant’s market and will be very much in a tenant’s market perhaps through the third quarter of this year,” said Joe Vargas, an executive vice president at Cushman & Wakefield. “There is a lot of vacancy that has to be eaten away.”
While an economic recovery is underway, hiring so far has been insufficient to drive many tenants to expand their offices. Frequently, brokers say, when tenants renew their leases they are taking less space than they had a few years ago because they have downsized or are fitting employees into smaller work spaces.
That pattern puts pressure on landlords, who “are getting more and more aggressive,” said broker Whitley Collins of Jones Lang LaSalle. “Landlords are desperate to get new tenants because there is so little demand.”
Nearly every lease signed in the last three years was a renewal, Collins said.
Landlords dropped rents to prevent tenants from leaving and few tenants have wanted to spend what it takes to move. It routinely costs from $55 to $125 per square foot to prepare new offices for occupancy, not including desks and furniture. Even with a generous contribution from the landlord for space improvements, upfront costs can be substantial.