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LAX Office Market is Picking Up

Jun 13, 2000

By Bob Howard
June 13, 2000 in print edition C-12

One of Los Angeles County’s longest-suffering office markets is at last showing signs of recovery as new businesses begin to fill long-empty space and rents begin to rise in buildings near Los Angeles International Airport.

Nobody is yet calling LAX a hot market or suggesting that businesses are clamoring to move there, but statistics show the amount of empty office space near the airport is gradually declining. Brokers say the shortage and high cost of space in other nearby markets–where rents are often double the LAX rates–are bound to push more companies into the airport area.

About 25% of the 4 million square feet of office space in the LAX market is empty, according to real estate researchers CoStar Group Inc. Office vacancy rates must drop to around 10% before a market is considered strong and healthy, real estate experts say.

But the airport market is looking better than it did just a year ago, when the vacancy rate was 5% higher–and considerably better than it did in 1998, when the vacancy rate exceeded 32%.

“The mentality is a lot more bullish than it was two years ago,” said broker John Ghiselli of Julien J. Studley Inc.

The LAX office market, made up of about a dozen buildings on Century and Sepulveda boulevards, was built primarily in the late 1970s and early 1980s to serve the then-burgeoning aerospace industry. So great was the demand from major aerospace companies that at least one high-rise on Century started construction with no more than a verbal promise of occupancy from a major tenant–which ultimately decided against leasing space. The end of the Cold War and resulting contraction of the defense sector sapped much of the life from the LAX office cluster.

Brokers say the declining office vacancy rate is starting to boost confidence in an office market that has been saddled with a bad reputation, whether deserved or not. Critics say the neighborhood suffers a lack of restaurants and street life, a city gross receipts tax that makes doing business more expensive than in competing municipalities such as El Segundo, jet fuel discharges from aircraft and traffic congestion during peak travel seasons that is even worse than usual for L.A.

The gradual leasing of the LAX market has emboldened building owners, according to broker Ghiselli of Julien J. Studley, who said landlords today are quoting rental rates 5% to 15% higher than they were six months ago.

What’s most telling, Ghiselli said, is that landlords–who not so long ago would pull out all stops to keep a tenant–“have raised the number at which they’ll refuse to do a deal.”

Another sign of renewed confidence in the market is a Van Nuys-based real estate company’s recent purchase of a 488,000-square-foot office complex at 5757 Century Blvd. that is more than half empty.

The buyer was an affiliate of Decron Corp. that purchased the complex for about $20 million and plans to invest $10 million to $12 million in upgrades and improved parking access, said David Nagel, Decron’s president.

The improvement in the Century Boulevard market over the last year represents a “dramatic decrease” in vacancy, according to Steve Solomon, a Colliers Seeley broker who helped former owner GE Capital sell 5757 Century Blvd. Solomon noted that vacancies along Century Boulevard reached 40% in the last decade.

Decron’s purchase price and upgrade budget combined represent a cost of about $61.50 per square foot for the building, a fraction of the price that office buildings sell for in higher-priced Southern California markets.

The relatively low purchase price means that Decron could charge rents of $1.50 to $1.60 per square foot per month and be profitable, according to Kevin Shannon, a Grubb & Ellis broker who worked on the deal when he was with Colliers Seeley. That compares with rents of $3 and up for the most desirable buildings in Westside markets such as Santa Monica and Century City, and rents of $2.50 or so in much of nearby El Segundo.

But it isn’t just the high cost of other markets that’s making LAX look good.

“The airport market is one of the few places that has big, contiguous blocks of space,” Shannon said.

The need for such space was a key factor in the decision of logistics company Expeditors International to rent 64,000 square feet last year at 5200 W. Century Blvd., according to Paul Arthur, the firm’s district manager. Expeditors leased two floors of 32,000 square feet each, expanding to the LAX location from a facility in El Segundo.

Rent was also a big consideration, according to Arthur, who said Expeditors needs to be near the airport because it provides international services for major corporations. Arthur wouldn’t disclose the rental cost for the company’s five-year lease, but it is clearly much less than the company would pay in surrounding markets.

Arthur said his company was aware of the airport area’s reputation as a weak market, but he said broker Jeff Kernochan of Fisher & Co. convinced Expeditors that “the reputation isn’t as bad as the reality, and there are some good properties here.” The final factor in Expeditors’ decision was the “attractive tax climate” provided by Mayor Richard Riordan’s L.A. Business Team, which arranged savings of $350,000 in business taxes.

The 5200 W. Century Blvd. building that Expeditors occupies is owned by Los Angeles-based Arden Realty Inc., which has been bucking the LAX trend by keeping its properties there almost fully leased.

The 330,000-square-foot building at 5200 W. Century is 97% occupied, and Arden’s 400,000-square-foot Skyview Center at 6033 and 6053 W. Century Blvd. is 88% full, according to Eric Hasserjian, regional leasing manager for Arden, who said rental rates range from about $1.45 to $1.70 per square foot per month at the two office complexes.

Arden has substantial holdings in Westside office buildings, but, Hasserjian said, “I couldn’t even find 10,000 square feet of contiguous space in one of our buildings on the Westside right now, let alone something like the [64,000 square feet of] space that Expeditors needed.”

Arden is in the midst of negotiating leases for most of the remaining space at 6033 and 6053 W. Century Blvd., according to Hasserjian, who said it’s inevitable that more companies will move to the LAX market, provided the economy remains strong, because office supply is limited and demand continues to rise.

Hasserjian, Shannon and Ghiselli all estimated that the airport market would take from 18 months to two years to improve to a 10% vacancy rate if demand for office space continues to increase at current levels.
Freelance writer Brad Berton contributed to this report.