They’re Still Waiting : Southland’s Office-Market Recovery Continues to Elude a Few Weak Spots

Parts of Southern California these days are like the neighbors who didn’t get invited to the block party when just about everyone else on the street did.

The party in this case is the commercial real estate recovery, which has filled once-empty office and industrial buildings and lifted most parts of the region out of a long slump. It has raised rents that had been flat or falling for years and created so much demand for new space in some business districts that new construction is appearing for the first time in years.

As widespread as this recovery is, however, some markets are still waiting for good news.

Brokers, developers and others familiar with the industry say there are at least four of these pockets in Los Angeles and Orange counties, all in the office category, that have lagged behind in the current recovery and will have a tougher time than most in coming back.

Century Boulevard

Based purely on the percentage of empty space, this is by far the weakest sub-market in Los Angeles County. More than 35% of the office space along Century Boulevard east of Los Angeles International Airport was empty at the end of the third quarter, according to figures from Grubb & Ellis Co. The area was one of the few office markets in Los Angeles County where the percentage of empty space increased between the second and third quarters.

The Century Boulevard market lacks the variety of restaurants, shops and other amenities that attract office tenants, said John Ayoob, a senior vice president with CB Commercial Real Estate Group, and it’s generally more congested and less conveniently located than competing markets.

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The gross receipts tax and the utility usage tax levied by the city of Los Angeles are also factors holding the boulevard back, according to Ayoob, who noted that nearby El Segundo has no gross receipts tax and a much lower utility usage levy.

“The utility usage tax can be extremely tough on some businesses, especially those that are telephone-intensive,” he said.

The better-quality buildings along Century Boulevard have started to recover, according to Ayoob. But he said prospects are limited for the market overall, because only about a third of the 3.5 million square feet on the boulevard is premium-quality space. Much of the rest is “old and functionally obsolete,” Ayoob said, meaning that “there is always going to be a big chunk of it that is difficult to lease, even in a strong economy.”

Mid-Wilshire

Mid-Wilshire, once home to a phalanx of Fortune 500 companies, was still considered an appealing enough market in the late 1980s that developer Donald Trump planned to build a skyscraper on the site of the old Ambassador Hotel.

Trump’s tower never materialized, however, and Mid-Wilshire has suffered over the years from a “mass exodus” of its most prestigious tenants, according to Rick Buckley, a vice president with CB Commercial.

“When the recession hit, it made a bad situation worse,” Buckley said. Mid-Wilshire--roughly the stretch of Wilshire Boulevard between Alvarado Street and Western Avenue--suffered even more than other markets during the recession, because the slump came while the area was also being disrupted by Metro Rail construction. Inexpensive and abundant space was available in nearby markets, and the neighborhood suffered from a reputation as a high crime area.

“This all happened at roughly the same time, so Mid-Wilshire property owners found they had to give tenants bigger and bigger discounts because of the torn-up streets, high vacancy rates and competition from foreclosures,” Buckley said. Foreclosures drive down rents because owners who buy buildings out of foreclosure pay lower prices for them and can therefore afford to charge substantially lower rents.

Despite these setbacks, Mid-Wilshire has a good chance to recover if the commercial real estate markets continue to improve.

“I’m bullish on the area,” Buckley said. Although the vacancy rate is high at more than 25%, it has declined by about 5% in the last year, and Mid-Wilshire merchants and property owners have worked hard to overcome its tarnished image, he said.

“There has been a concerted effort by local businesses, the community and the Police Department to try to create a more positive image,” Buckley said, pointing out that Los Angeles police now have a station in an office building there and that the streets have been spruced up after the completion of Metro Rail work. Statistics show robberies have been falling since 1992.

“It might take another 12 to 36 months, but if rents get high enough and space gets tight enough in other areas, more companies will consider coming to Mid-Wilshire again,” he said.

Hollywood

As do other slow-to-recover business areas, Hollywood has a reputation for being seedy and crime-ridden, although police statistics show crime there is diminishing.

Whether reputation matches reality is hardly the question, according to senior broker Vincent Pellerito of Cushman Realty Corp., because such a reputation “is awfully hard to shake” once it takes hold.

“Hollywood is not going to recover appreciably in the foreseeable future” because there are too many markets further west and south where tenants are more likely to go, Pellerito said.

The Hollywood market is even weaker than indicated by a first glance at vacancy statistics, said broker David Lachoff of Grubb & Ellis. Although his firm lists a 22% vacancy rate for the Hollywood/West Hollywood sub-market, Lachoff said West Hollywood is actually a strong market. Most of the empty space is in Hollywood, where many buildings are a third to half-empty.

Hollywood is saddled with old buildings that lack fiber optics and other modern telecommunications and electrical systems, Lachoff said. And the market “has been questionable for a number of years from the standpoint of safety.”

Both brokers said Hollywood’s best hope lies in the construction of new office space, retail centers and restaurants to make the market more appealing.

Local business owners, redevelopment officials and community groups are pushing hard to launch new development, Lachoff said. And Hollywood could regain tenants when high rents and a shortage of space push them out of other markets.

“It will be a good market if it gets new development,” he said.

Central Orange County

The numbers show that 18.4% of the office space in central Orange County is empty, a rate that’s neither great nor dismal, according to industry standards. But this market trails the rest of the county in its comeback.

One of the biggest reasons for the slower pace of recovery is the downtown Santa Ana market, which suffers from a reputation as a high crime area and faces stiff competition from other, newer markets, said George Economos, a senior vice president with Grubb & Ellis.

Fear of crime has led to “the flight of law firms and title companies” that have traditionally kept shop in downtown Santa Ana, according to Economos, who said vacancies exceed 20% there.

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Economos contrasted central Orange County with the western part of the county. The western sub-market was “close to as bad as central” until about last summer, but it has improved considerably since then, he said.

Central Orange County has a solid base of courts and government agencies that are not likely to move, but the general pattern of new housing and commercial development in the county has been southward and away from the central market. When and whether this market recovers will depend on whether tenants are willing to buck that trend and move back to the central area when rents climb too high in other parts of the county.

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Although these four markets aren’t the only ones with relatively high vacancy rates, industry experts say they face a tougher road to recovery because of factors other than the general slump that affected all office markets.

Although other markets may have comparably high vacancy rates, for example, those markets often have such advantages as newer buildings and more convenient locations that are expected to bring them back faster.

In downtown Long Beach, for example, the vacancy rate is relatively high (nearly 22%), but brokers believe the modern buildings there and nearby retail developments will drive leasing up. About 20% of the Miracle Mile/Park Mile space along Wilshire Boulevard is empty, but the vacancy rate there dropped 2 percentage points in the third quarter, and the market has attractive buildings that are drawing tenants from Hollywood and other surrounding areas.

Downtown Los Angeles already shows signs of recovery, and parts of the long-suffering South Bay market have recovered sharply.

“The El Segundo market went from a 24% vacancy 16 months ago to about 10% now,” Pellerito said. “That shows you how fast a market can turn around if it has the right ingredients.”

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For Rent

The economic recovery has begun to fill office space to fill office space through much of the Southland, but some areas have yet to feel the lift. These office markets have shown little improvement in vacancy rates since the recession.

Mid-Wilshire: 25.9%

Century Boulevard: 35.1%

Hollywood: 22.0%

Central Orange County: 18.4%

Source: Grubb & Ellis Co.