Rental Rebound

By Ed Moosbrugger

March 14 -- Downtown Santa Monica's office market continues to post solid improvement, although activity remains short of the dot-com bubble activity of a few years ago.

Commercial real estate brokers report that office vacancy rates have dropped below 10 percent and rental rates are firming up.

The market is a lot more active than a year ago, said Randy Starr, a principal in Tenzer Commercial Brokerage.

"We are getting overwhelmed with creative type tenants," he reported.

"Right now rates are going up," he said. "Most of the available space, even on Second and Fourth streets, should be absorbed in the next six to nine months."

Vacancies have dropped to 9 percent from 12 percent a year ago and the market is excellent, said Vincent C. Muselli, president of Muselli Commercial Realtors. Rents are up about 5 percent.

The market is the best it has been in three years, but Eric Broida, principal in Broida Commercial Brokerage said it's "quiet" compared to the boom in leasing activity several years ago.

"It is nowhere near 1998, 1999," he said. "It started to slow in 2000."

Then came 9/11 in 2001.

Broida said much of the leasing activity involves tenants moving from one building to another Downtown.

Still, leasing activity has increased and rental rates have firmed up from a year ago, Broida said.

Tenants have had it their way for a few years, but now the market is in more of a balance and rents likely will move higher, brokers said.

That's partly because there has been little office building construction in recent years. Starr expects the vacancy rate to drop to a very low 4 percent to 5 percent by the end of the year if current demand remains stable.

"You want to tie up your space now," he counseled tenants. "A year from now it will be in the landlord¹s favor."

Among businesses that are fueling the Downtown market are entertainment, architecture, real estate finance and venture capital, according to brokers.

Muselli said activity spans across a wide range of businesses and professions.

Downtown Santa Monica isn't alone in experiencing a stronger office market. Vacancies have also dropped substantially in Los Angeles.

County, with the Westside showing some of the best improvement.

Although the Downtown Santa Monica market has improved, there are some problems. Muselli noted that some large tenants leave because they can't find the amount of space they need.

One example is advertising agency Rubin Postaer and Associates, which vacated 110,000-square-feet of space Downtown when it relocated to Colorado Center (formerly MGM Plaza and now to be Yahoo! Center) in Santa Monica.

But much of that space is being filled. Starr said the ad agency's 80,000-square-foot former main building on Second Street is now 70 percent leased and probably will be fully leased by May.

Parking hassles are another issue Downtown.

"Parking (is) always a concern," Muselli said. "Security and cost."

Parking is of particular concern inside the Bayside District because of a lack of enough parking permits for employees in city parking structures, Broida said.

Some tenants are moving from buildings that rely on City parking structures to buildings with their own subterranean parking, Starr noted. Planned new and expanded City parking structures should help alleviate the problem of waiting lists for employee permits, he said.

Despite the parking problems, Downtown remains attractive to tenants who like the restaurants, convenience to service and shopping, which help attract good employees, Muselli said.

"It's still one of a kind," said Starr, citing the pedestrian-oriented Third Street Promenade. ³People love to leave their offices and walk around," he said.

Downtown has benefited because many business owners live on the Westside and want their offices near their homes, Broida said. "They love the Promenade," he said. "They can entertain their customers. Employees love it."

SANTA MONICA HOTELS ended 2004 on a mixed note, with the occupancy rate dipping 3.1 percent in December from a year earlier, while the average room rate jumped 12.5 percent.

Hotel occupancy was 59 percent in the final month of 2004, and the average room rate was $192.30, according to PKF Consulting.

For the year 2004, the occupancy rate rose 3.1 percent to 77.8 percent and the average room rate improved 9.4 percent to $207.83. Santa Monica had one of the smallest increases in occupancy rate and one of the biggest gains in room rates in Los Angeles County markets tracked by PKF. Santa Monica's occupancy and room rate both were above county
averages.