- The Washington Times - Friday, March 13, 2009

LOS ANGELES (AP) - When one of downtown Los Angeles’ largest landlords said this week that it may seek bankruptcy protection because the company can’t pay its loans, it didn’t bode well for the commercial property market.

Meruelo Maddux Properties is just one of many Los Angeles landlords that is struggling against the recession and job losses, which are driving vacancies higher and giving tenants leverage in renegotiating more favorable lease terms.

“I think 2009 will inevitably be a very difficult year for property owners,” said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services.

The firm projects office vacancies in Los Angeles to climb to about 14 percent this year from almost 11 percent last year. Rents are expected to decline between 5 percent and 7 percent this year. In both cases, the projections are a little bit less than the national average.

Los Angeles County’s office, retail and hotel markets are getting the worst of it, while apartment and industrial landlords are faring somewhat better.

“We have definitely seen a market turn here in the last five months,” says Lew Horne, executive managing director of CB Richard Ellis Inc.’s Los Angeles region.

Sales of office buildings are down because the financial crisis has made banks weary of lending.

“Right now would not be a time where we would be advising clients to be selling their buildings,” Horne says. “For the most part, there’s a feeling in the market that rents probably won’t be growing … in the L.A. County marketplace, certainly for the next 12 months.”

Many tenants are looking to shorten their leases and shrink their square-footage. And some landlords bending over backward to appease tenants and plug vacancies before they happen, Horne says.

Landlords are also contending with a spike in subleasing, which can further undermine their prospects for new tenants and push lease prices even lower.

In Los Angeles County, there’s about 5.4 million square feet of office space available for sublease, with the majority of it in West Los Angeles, downtown and in the west side of the San Fernando Valley, says Chuck Hunt, executive managing director at the Los Angeles arm of real estate services firm Grubb & Ellis Co.

West Los Angeles and downtown, which had strong concentrations of office space occupied by financial services companies, have been the hardest hit, experts say.

Faring a little better are the South Bay near the adjacent ports of Los Angeles and Long Beach. While the office buildings surrounding the Los Angeles International Airport continue to have higher vacancy rates than other submarkets.

Falling rents are making it possible for tenants to get into some formerly expensive office markets, like West Los Angeles.

“What happened was everybody wanted to be in West L.A., so the prices went up,” Hunt says. “Now everybody is willing to look at downtown, so West L.A. prices are coming back down.”

Hunt estimates that office rents in the county range from about $3.25 a square foot in West Los Angeles to $1.25 in less coveted areas.

The industrial market, meanwhile, is holding up better, with a relatively low vacancy rate.

“We’re just beginning to see some of that chipped away,” Hunt says.

The decline in consumer spending has hurt retailers and led to less shipping traffic through the ports and more vacancies in warehouse space and other facilities, particularly around the South Bay area.

That’s led to a rise in sublease industrial space, but vacancies remain below 10 percent, Hunt says.

Marcus & Millichap projects industrial space vacancy will climb from 5.7 percent last year to 8 percent this year. But that’s still better than the expected 12 percent nationally.

Lease rates are dropping, however.

The average monthly cost per square foot at 55 cents, down from about an average of 63 cents a year ago, Hunt says.

The Los Angeles retail market, like other cities, is hurting from the effects of the recession as consumers cut spending, squeezing tenants’ cash flow and hurting their prospects for credit.

Many of the small shopping centers have a lot of empty store fronts, in particular, those in areas of the county that saw heavy new residential construction in recent years, such as Valencia, Lancaster and Palmdale, are struggling with vacancies, experts say.

Average rents for strip malls are down as much as 40 percent from where they were two years ago, Hunt says.

Major malls are generally better off. They have lost some of their smaller tenants, but most of their bigger ones have longer term leases.

“They certainly have vacant storefronts, but not to the same degree that some of the smaller strip centers might have,” Hunt says.

Marcus & Millichap projects retail vacancies will jump to over 6 percent this year up from 4.5 percent.

Los Angeles’ apartment market trends have been positive for tenants _ or at least those with jobs.

Between 2003-2007 average rents grew between 4 percent and 6 percent a year and were flat last year, but job losses and even the lure of discounted foreclosed houses are contributing to rising vacancies and falling rents.

Nadji expects apartment rents to drop 3 percent to 4 percent from where they were last year, while vacancies will approach 6 percent up from 4.5 percent last year.

He noted, “For L.A., that’s a big reversal of fortunes.”

___

You can e-mail Alex Veiga at aveiga@ap.org.

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