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Downtown Commercial Real Estate Turning Corner  

By Ed Moosbrugger

April 21, 2011 -- About a year ago, commercial real estate broker Eric S. Broida said he was hearing “a ton of worry” from his office space clients in Downtown Santa Monica. Now “I'm hearing less worry,” said the owner of Broida Commercial Brokerage Group. “Activity is still slow but beginning to pick up a bit.”

Those comments reflect the positive shift that is taking place in the market.

After a nosedive in 2009 because of the deep recession, Downtown office leasing activity has shown recent signs of improvement. Vacancies appear to be declining, rents have stabilized and some tenants, particularly in the Internet business, are expanding as the economy picks up.

“We're moving space,” said Rafael Padilla, a principal in PAR Commercial Brokerage, in early March. “Activity has picked up over the past five months. We are 50 percent busier than last year.”

A year ago, in the wake of the sharp office market decline in 2009, Padilla said the seedlings of improvement were beginning to show. Now, he said, “the seedlings are taking root and seem to be flourishing.”

Randy Starr, principal and CEO of Starrpoint Commercial Partners, reported strong activity, citing expansion by Internet companies and the positive impact of the reopening of Santa Monica Place last August.

The extensively remodeled shopping center has added to the amenities that make Downtown Santa Monica “a great place for Internet companies to hire and grow,” Starr said.

Despite the recent activity, the office market hasn't recaptured the buoyancy of pre-recession times, when rents soared in an overheated market.

“It's certainly better than last year,” said John Warfel, a principal of Metropolitan Pacific Capital. “The market is not robust,” but “we are seeing a slow increase in activity and number of deals... It's a very cautious market from the tenant's side.”

Warfel is seeing more activity from smaller tenants, but said they are more interested in short-term leases. As for rents, brokers report that they have stabilized and some landlords are offering fewer concessions to tenants.

Real estate experts say they don't expect the recent announcement that Internet giant Google will expand locally in Venice rather than in Downtown Santa Monica to have a major impact on the Downtown market.

“Everybody would have preferred that Google expand in Santa Monica but I don't think it is a major issue,” said Warfel, who is a vice chair of Downtown Santa Monica, Inc.’ Board of Directors. Indeed, brokers expect that the Downtown space Google vacates will be leased readily.

“We need more space,” Broida said, noting that “vacancies are filling up” although there is still some space that is not leasing.

Very little new office space has been developed Downtown in recent years, but an office project is in the works on the site of the Michael’s store on Fourth Street. It would include two stories of retail and two stories of office space.

The project is in plan check at the City and developers expect permits to be issued by this summer, David Forbes Hibbert, architect for the development, said in early March. It's a question of whether construction will start this year or in 2012, he said. The retail component probably will drive the project, Hibbert added.

The office market Downtown is “pretty healthy” and tighter than in many other areas, the architect said. Still, residential development Downtown is stronger now than offices, and another project Hibbert is working on at Fourth and Broadway is being changed from offices to residential, he noted.

Going forward, the commercial market should benefit from an improved attitude among private employers if the economy continues to improve.

“People seem to be tired of waiting,” Padilla said. “They are tired of putting things on hold.”

* * *

Santa Monica's tourism industry finished 2010 on a solid note, capping a year of gains that exceeded expectations. The hotel occupancy in December rose 4.8 percent from a year earlier to 69.8 percent, and the average room rate increased 4.9 percent, according to a report from Colliers PKF Consulting.

For the full year, Santa Monica's occupancy rate jumped 7.4 percent to 82.4 percent and the average room rate increased 4.1 percent to $254.02. Santa Monica had the highest occupancy rate among submarkets in Los Angeles County tracked by PKF. Santa Monica's percentage increase in room rates was second only to West Hollywood.


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