By Ed Moosbrugger
May 7 -- Downtown Santa Monica’s office market has made a quick change from buoyant to bumpy and it could get worse. Vacancies are up. Rental rates are down. Landlords are making more concessions to keep and attract tenants.
It reflects the weak economy and unwillingness or inability of some tenants to pay what have been some of the highest rents in the Los Angeles region.
Downtown brokers differ in their assessment of how bad it has gotten, but agree it is weak and it happened fast.
“It’s the fastest change I have ever seen” from a landlord’s to a tenant’s market, said Randy Starr, a principal in Tenzer Commercial Brokerage.
One result: Landlords are getting over the sky-high rents of 18 months to two years ago, Starr said.
Space that was going for $5.50 a square foot is now as low as $3.50 and space that was $4 has dropped to $2.75-$3, Starr said.
Buildings that were asking $4.50 have fallen to between $3.50 and $3.75, said Vince Muselli of Muselli Commercial Realtors.
“Free rent concessions are being offered in many buildings,” he said. “We have not seen this for some time.”
Rents have fallen about 20 percent, depending on the building, said Rafael Padilla, a principal of PAR Commercial Brokerage.
The weak market could go on for at least another year, brokers say.
Still, Downtown Santa Monica remains one of the most attractive office locations in Los Angeles County because of many amenities, including its pedestrian orientation and short walking distance to restaurants, stores and personal services.
One big question, however, is how much tenants can afford to pay to be here.
“I think Downtown Santa Monica is doing better than many regions,” said John Warfel, a principal of Metropolitan Pacific Capital. “It is still a very desirable place to be.”
But, he said, you have to be a healthy company to justify the cost.
Some tenants are relocating to other Westside areas with lower rents, Muselli reported.
Increased vacancies could have widespread impact on Downtown Santa Monica.
“The concern I have is the impact this will have on the retail and restaurants in the area which are already suffering due to the economy,” Muselli said. “Less office tenants and workers mean less business.”
Brokers report that deals are getting done, although they may not be to the liking of landlords.
“Landlords need to understand the economic times are different and need to adjust rents and incentives,” Muselli said.
“The goal is to keep tenants in your building,” Starr said, and that may require aggressive deals.
Landlords feel pressured because there is a lot of sublease space on the market in addition to the direct vacancies. Starr estimates vacancies at about 18 percent when subleased space is included.
Brokers differ on just how bad the situation is.
“I wouldn’t say we are in a crisis but the market is very, very bad,” said Eric S. Broida of Broida Commercial Brokerage Group. “It’s starting to crumble. Tenants are laying off employees. They can’t afford space.”
Broida doesn't think the market has hit bottom yet, but said, “I’m sure that in three to five years it will be all turned around.”
Muselli expects vacancies to rise and rents to drop over the next year, while Starr thinks the market will be rocky for about a year.
The market has gotten worse, but isn’t as bad as it was during part of the 1990s, Padilla said.
“It’s not a state of panic,” he said. “It’s not complete death and destruction out there.”
Tenants are getting better deals, “but the tenant isn’t wearing a mask and holding up the landlord either,” Padilla said.
“It certainly has slowed down,” Warfel said. “At the beginning of the year it looked quite bleak. There are some signs of getting back to a more active market. There are more landlord concessions, but it is stabilizing a bit.”
Despite the tough times, Downtown’s attractiveness should pay off when the region's economy improves.
When the market turns, Starr said, Downtown Santa Monica will fill up first.
