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Office Market Tight

By Ed Moosbrugger

August 15 -- Pity the tenant who is looking for office space in Downtown Santa Monica. Vacancies are low and rental rates have moved up substantially.

“Downtown is as tight as I have ever seen it,” said Eric S. Broida of Broida Commercial Brokerage Group.

Other Downtown brokers agree that the market has become very tight.

“It is a lessor’s market,” said Vincent C. Muselli of Muselli Commercial Realtors. "There is a shortage of space in all size categories. Rents have gone up 15 percent to 25 percent over the last year for Class A office space.”

The market is being driven by a strong economy, little new office construction Downtown and the many amenities that make the area attractive for tenants.

“Santa Monica is the most expensive submarket in Los Angeles County,” said Randy Starr, a principal in Tenzer Commercial Brokerage. “It’s the location and amenities.”

Many office users want to be in Downtown Santa Monica because it is attractive to talented young workers in the Internet and entertainment industries, Starr noted.

“It’s a fun place,” he said. “It’s a good environment.”

Some brokers are worried, however, that rents have moved so high that it will make it difficult for some tenants to survive economically.

“It’s getting to that crazy point,” Broida said. “How will this sustain itself? I’m counseling my landlords not to be too greedy.”

There is a wide range of quoted rental rates Downtown, but landlords aren’t always getting what they ask for at the high end.

Rates generally range between $3.50 and $6.50 a square foot, Muselli said.

Starr cites a building on Second Street that formerly leased for $3.25 a square foot that has spiked to $4.50 to $5.25, and still attracted two new media and Internet tenants.

He believes $4 to $4.25 is the new lower base rent for Class A space.

About $3.50 to $4.50 is a realistic number for Downtown, said John Warfel, a principal in Metropolitan Pacific Commercial Real Estate Services.

Warfel said some of the highest rental rates are not typical, and he’s not yet concerned.

He noted that the office market is tight throughout Los Angeles County because of sustained economic growth.

“Executives of the dot coms will pay the rent,” Starr said. “People in Brentwood and Pacific Palisades are not going to drive to El Segundo for cheaper rent.”

Still, Starr believes that some larger tenants may think twice when it comes time to renew leases.

“People are paying it now, but as leases roll over they are starting to look for other alternatives,” Starr said. “Once some of the larger tenants start to move, I think rates will come down or not increase.”

“Rates are moving up, but there’s a ceiling,” Broida said.

Muselli expects the market to remain tight, but for rents to stabilize at present levels. The smaller tenant who rents less than 1,000 square feet of space is being squeezed out because of limited supply, he said.

Muselli puts the vacancy rate at less than 2 percent, compared to 4 percent a year ago. Some other reports put the vacancy rate a little higher, but the market is definitely very tight.

Warfel, who is a member of the Bayside District Corporation board of directors, expects the market to remain strong, barring a weak economy.

“People realize how nice it is to have an office here,” he said. “The only problem is housing costs,” which affects larger employers whose workers can’t afford to live here.

Muselli pinpointed what tenants like about Downtown: “Ability to walk to restaurants, shopping and entertainment. Clean air, beautiful environment to work.”

“It’s a true Downtown in the old sense of the word,” Warfel said.

Downtown has attracted a diversity of tenants, including architecture, law, entertainment, financial, Internet and design businesses, as well as foundations. Not to mention the City of Santa Monica, which Muselli said is one of the larger tenants Downtown.

Meanwhile, some tenants are deciding to stay put when their leases expire, getting a little break from landlords for renewing, rather than venturing into the tight market to find new space.

Warfel summed up the situation: “People want to be here, and there’s only so much space.”

SANTA MONICA HOTELS had a down May, with the occupancy rate falling 3.2 percent from a year earlier to 80.4 percent, according to a report by PKF Consulting. The average room rates edged up 2.1 percent to $261.49.

Still, for the first five months of 2007 Santa Monica was tied for top spot in occupancy rate among Los Angeles County submarkets tracked by PKF. Santa Monica’s occupancy was 81.7 percent, down 0.7 percent from a year earlier. The average room rate increased 7.5 percent to $2.







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