By Ed Moosbrugger

March 23, 2010 -- Downtown Santa Monica's office market, which took a nosedive last year, continues to be plagued by high vacancies and uncertainty about the pace of economic recovery.

There's little doubt that the market remains soft, although real estate brokers are divided on just how bad things are and whether the market has begun to shows signs of improvement.

A lot will depend on the pace of job recovery.

“I would say it's still a tough market,” said John Warfel, a principal of Metropolitan Pacific Capital. “There is more activity but not a lot of deals being done. The deals are often for shorter terms. People are still nervous.”

Reflecting the uncertain climate, vacancies remain high (15 percent or more by some accounts) and rents are probably down at least 20 to 30 percent from their peak.

While even the most optimistic observers don't expect a fast recovery, some brokers still see glimmers of hope.

Although there was almost no leasing activity in late 2008 and early 2009, since then the renewal market has picked up a lot, said Randy Starr of Starrpoint Commercial Partners. He believes that the market has hit bottom and begun to rebound.

Rental rates are the lowest he has seen in 10 years, which makes it a good time for healthy tenants to consider long term leases, Starr said.

Also in the positive camp is Rafael Padilla, a principal of PAR Commercial Brokerage, who reports more activity in recent months.

“Subleases that were undercutting the market are getting leased up,” he said, noting that rents seem to be stabilizing.

He expects the market to slowly improve, barring another bad jolt to the economy. More tenants are signing long-term leases after a period when just about everything was short term.

“When you look at the aftermath of a disaster and see seedlings coming out, that's good news,” Padilla said.

Whether the seedlings will grow or wither is another question. Some brokers aren't buying the idea that things are improving.

The market seems to be getting worse, in the opinion of Vince Muselli of Muselli Commercial Realtors. He expects vacancies to rise and tenants to continue downsizing.

“Until jobs are created the space will increase and rents will come down,” he said.

Eric S. Broida of Broida Commercial Brokerage Group said, “It's definitely worse than it appears on the surface. I just hear a ton of worry from my clients.” Some tenants are shrinking in size or moving out of the city.

It's hard to get an accurate handle on the market, partly because some landlords are requiring brokers to sign confidentiality agreements not to discuss terms of deals, including concessions such as free rent or parking, Broida said.

He expects a long, slow recovery for the market and believes some landlords are keeping their rents too high.

Starr, however, already sees signs of recovery. He believes the vacancy rate has dropped from 15 percent to closer to 10 percent.

“We're busy again,” Starr said, noting that “we're back to getting multiple offers on good spaces.” Still, a tenant's credit strength remains a key factor in being able to seal deals.

Downtown Santa Monica continues to appeal to entertainment and internet companies because the area is attractive to employees, Starr said.

Starr expects activity to pick up and vacancies to drop as the year progresses. The planned reopening of Santa Monica Place in August will make Downtown even more attractive to office tenants, he said.

Reflecting the difficult economy, however, there doesn't seem to be as much demand for entertainment industry post-production space, said Warfel, who is also a vice chair of the Bayside District Corporation board of directors. He does expect that part of the market to recover, however.

Warfel also expects the office market to remain soft until the job market recovers, but he is more positive than he was a year ago.

“I would say it's still a tough market, There is more activity but not a lot of deals being done. The deals are often for shorter terms. People are still nervous.”
       John Warfel,