Southern California Office Real Estate Blog

SOCAL OFFICE REAL ESTATE SNAPSHOT – AUGUST 2010

By Jodi Summers

According to a recent Grubb + Ellis study, the Los Angeles office market is near bottom. The report notes, “For the 11th consecutive quarter net absorption was negative as office space continued to be vacated by occupiers unable to survive under current economic conditions – but this quarter the decline slowed down noticeably.”

This positive news is confirmed by the CoStar Group in its The State of the U.S. Office Market: Mid-Year 2010 Review & Forecast. The quarterly analysis of the U.S. office market confirmed positive net absorption for the quarter and that office vacancy rates appear to have peaked and are no longer rising.

“The fact that we are clearly showing some sort of bottom and we don’t have a significant increase in vacancy this quarter is very positive news,” affirms Andrew Florance, CEO of CoStar.

As predicted, California is lagging behind the rest of the country in unemployment (9.5% June 2010 national average). The state unemployment rate declined to 12.3% in June.

That’s an employment gain of +0.7% on a year-to-year basis.

Anything is better than nothing. Landlords have been battling to maintain the value of their assets. Throughout Los Angeles, asking rates for class A and B have fallen more than15% off of their 2008 high –> from $3.01 and $2.17 respectively, notes Grubb + Ellis. On the Westside, office space has suffered a drop in asking rents from 24% - 30%.

Yet, if it seems bad here, it’s got to be worse elsewhere. The U.S. Bureau of Labor Statistics (BLS) county-level employment data covering the fourth quarter of 2009 (4q2009) reveals that three of the ten largest counties in the U.S.-measured by employment in December 2009-were in Southern California. Los Angeles County ranked #1; total employment was 3.93 million workers, down by -5.3% over the year. Orange County ranked #7; total employment was 1.36 million workers, down by -6.2%. San Diego County ranked #8; employment totaled 1.25 million workers (-4.9%).

Despite our impressive statistics, with record-high unemployment, the office sector needs employment gains to generate increased demand for space. Only two other states have higher unemployment rates than California: Nevada (14.2%) and Michigan (13.2%). Out of the three, only Nevada saw its unemployment rate rise in June.

We’re here to help you with commercial properties. Please contact Jodi Summers -jodi@jodisummers.com or 310.392.1211 and let us move forward together.

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http://www.globest.com/news/1704_1704/losangeles/300864-1.html?ET=globest:e22790:277110a:&st=email

http://www.bls.gov/news.release/pdf/cewqtr.pdf

http://www.costar.com/News/Article.aspx?id=195F06A0749794A8335951CD840A973E&ref=100&iid=190&cid=383F14EEE265B182474DA2442BACBBBF

http://www.edd.ca.gov/About_EDD/pdf/urate201009.pdf

http://www.laedc.org/eedge/index.html#1

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GREEN LEASING TOOL KIT

By Jodi Summers

Studies and Awards are praising green commercial buildings for creating higher occupancy rates, stronger rents and higher sales prices. As we’re in a down market for leasing, those in the know want to share, so the California Sustainability Alliance has developed and test strategies to green California’s commercial office space. This effort focuses on “green leasing”, i.e., integrating sustainability practices into the entire commercial leasing process. The Green Leasing Toolkit 2.0 includes insight on service provider selection; marketing of buildings, development of green specifications; request for proposal (RFP) and letter of intent (LOI) drafting; site selection and due diligence; and the negotiation and drafting of realistic and enforceable lease language.

The tools offered in Green Leasing Toolkit 2.0 are relatively easy to implement. These tools can be used by both landlords and tenants who manage or occupy large portfolios of facilities as well as small business owners and landlords who hope to green an individual building.

The Toolkit supports tenants and landlords in the following ways:

* Educating their organizations

* Developing their own green leasing policies and requirements

* Communicating policies and requirements to the market

* Measuring and comparing the green attributes of different buildings

* Developing specific lease language

http://sustainca.org/green_leases_toolkit

http://www.socalgreenrealestateblog.com/?p=52

CALGREEN – > CALIFORNIA NOW HAS THE COUNTRY’S GREENEST BUILDING STANDARD

By Jodi Summers

Bravo to us! California has adopted the greenest building standards in the United States…and the world.

The new code, called Calgreen, goes into effect next January 2011. It requires all builders to:

v Install plumbing that cuts indoor water use.

Mary Nichols, chairwoman of the California Air Resources Board, said the new building code would require developers to slash water use in their buildings by 20%, using more efficient toilets, shower heads and faucets.

v Divert 50 percent of construction waste from landfills to recycling.

v Use low-pollutant paints, carpets and floorings

v Buildings will be given certificates of occupancy occupied only after strict energy standards were verified.

In addition, for non residential buildings:

v Install separate water meters for different uses.

v Mandates the inspection of energy systems by local officials to ensure that heaters, air conditioners and other mechanical equipment in nonresidential buildings are working efficiently.

v It allows local jurisdictions, such as Los Angeles and San Francisco, to retain their stricter existing green building standards, or adopt more stringent versions of the state code if they choose.

“California should be proud… These are simple, cost-effective green practices. …” notes Tom Sheehy, acting secretary of the state Consumer Services Agency and chair of the California Building Standards Commission, which approved the standards. “This is (something) no other state in the country has done - integrating green construction practices into the very fabric of the construction code.”

While California’s largest metropolitan areas have adopted their own green building standards, these new regulations will be particularly useful for smaller jurisdictions that have been unable to develop their own green construction guidelines.

This is a positive alternative to LEED construction standards. Sites Sandra Boyle, an executive vice president of Glenborough, a developer, “The cost for owners to go through this rating system is astronomical — in a very challenging commercial real estate market.”

“You will have a whole bunch of cities that never would have included this in their building doing it, and doing it in a way that won’t kill the economy,” observes Matthew Hargrove, a vice president with the California Business Properties Association. “Outside the coastal areas it will be helpful - like in West Sacramento, where they looked into creating a green building code but balked because it’s cumbersome to develop and they didn’t have the resources.”

Buildings currently account for about one-quarter of the state’s total greenhouse gas emissions. These new standards are applauded as an important step in helping California meet its goal in reducing the state’s greenhouse gas emissions by 30 percent by 2020.

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http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2010/01/13/MNDR1BH9SA.DTL#ixzz0dJ9grkaW

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2010/01/13/MNDR1BH9SA.DTL

http://www.latimes.com/business/la-fi-green-building11-2010jan11,0,1841989.story

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LOS ANGELES OFFICE REAL ESTATE SNAPSHOT – APRIL 2010

By Jodi Summers

It’s no secret that office space in Los Angeles has taken a huge hit. Take comfort in knowing we are not alone. Vacancy rates rose as demand fell, and rents followed. Globally office market rents decreased by 10%, the last time prices fell all around the world was 2003. What made this office downtown unique, according to a recent report Cushman & Wakefield, was that. “no market escaped and rents were down in every region; a trend not previously seen.”

Globally, Asia Pacific recorded the steepest decline year on year, with rents falling on average by 16%. Singapore, Hong Kong and Tokyo recorded falls of 45%, 35%

and 21% respectively, but they weren’t the worst locations. Ho Chi Minh City saw the largest compression in rents with a fall of 53%.

In terms of rental performance the America saw rents decline by 7% during 2009. South America saw rental levels move down by 5%, while in North America they fell further, by 8%. Midtown Manhattan remained the most expensive office location in the Americas region during 2009, but rents dropped 4% over the year. Thanks to rising exchange rates, the Brazilian cities of Rio de Janeiro and Sao Paulo became the second and third most expensive locations in the Americas, surpassing the cities previously in second and third place Boston and New York (Downtown).

Los Angeles did not fare nearly as well year as occupier demand slowed and vacancy levels increased. We saw lease rates drop 16%, averaging $51.68 per square foot annually. Our economic recovery is so fresh; rents will still remain low for the first half of this year, but should start to improve in the third quarter.

Overall, North American rental performance was more uniform with Canada, US and Mexico easing down by between 2% and 14% in 2009.

On a more optimistic note, South America and the Middle East & Africa showed the best performance in terms of rents, recording rental falls of 5% respectively. Argentina was the only South American country to record double digit falls.

The great irony comes in South Africa, which actually saw rising lease rates. South Africa supported regional performance in the Middle East & Africa.

Western Europe recorded an annual decline of 11%, but was peppered by more series declines in some major areas. Madrid, Central London, Dublin and Oslo recorded rental declines in excess of 20%, as these markets were particularly hard hit from the fallout of the financial crisis. Office rents in Central & Eastern Europe did not hold up nearly as well, with many cities recording rental declines of more than 20% - Kyiv and Moscow were the hardest hit. Kyiv fell a whopping 52% while Moscow lease rates dropped 33%.

The top three most expensive locations remained constant, Tokyo was ranked number one in the world, while London West End moved into second place. Hong Kong fell

from first to third position.

And now, good news – most global economies are expected to see positive GDP growth in 2010. Globally, rents are anticipated to reach their low point by midyear. Tenants will still retain the upper hand as vacancy rates remain high and demand remains low.

Of course, the recovery will vary from region to region and from city to city. Expect stabilization in the final quarter.

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LOS ANGELES 2010 – OFFICE BUILDING REAL ESTATE PREDICTIONS

by Jodi Summers

Put on your sunglasses, the future of the Los Angeles office market is starting to look bright. After two years of job cuts, payrolls are predicted to expand payrolls minimally in Los Angeles County in 2010, according to the 2010 National Apartment Index report by Marcus & Millichap, and the 2010 predictions of the Urban Land Institute.

Industry sages such as Xavier Gutierrez, Managing Director and Principal, Phoenix Realty Group, observes, “Los Angeles is better positioned than most areas to survive the residential and commercial real estate fallout due to its very diversified economy.  Since the 1990s, when the local economy was heavily dependent on the defense industry, LA has cemented its importance as the gateway to Asia, luring US companies that want to take advantage of foreign markets through the country’s largest port and the massive infrastructure of rail and roadways linking warehouse facilities in LA and the Inland Empire.”

Conservative investing is the tone. Marcus & Millichap suggests that “economic headwinds remain formidable…. “The recovery will be muted because of slow job growth.”

The NAI concurs, noting, “Following a loss of 115,000 jobs in 2009, payrolls are forecast to expand by 0.3 percent this year, with the addition of 13,000 positions.”

Currently, it is estimated that around 51 million square feet of vacant office space is available for lease throughout the Inland Empire and Los Angeles and Orange counties. The Los Angeles Economic Development Corporation reports that forward thinking companies in fields such as technology, entertainment and R+D are using this low rent era to upgrade to bigger or more prestigious space so they are well-positioned for the rebound.

Experts say the wild card is commercial mortgage maturities, which are in the hundreds of billions of dollars at this point.

Gutierrez is optimistic. “Private equity sources are ready to pounce on cash-generating distressed assets and just waiting for the debt markets to come back and the economy to stabilize with job losses bottoming out,” he notes.

PREQIN, which specializes in offering services for companies involved in alternative investments, suggests that given the size of Southern California’s population and economy, $173 billion of private equity capital is waiting to be invested from a worldwide set of sources.

All sources seem to conclude that there is an optimistic future for the Los Angeles office market.

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http://www.uli-la.org/node/382

http://www.marcusmillichap.com/aboutus/News/Current/020510_los_mm.asp

http://www.globest.com/news/1580_1580/insider/183133-1.html

http://www.laedc.org/

http://www.preqin.com/

SO MANY OFFICE BUILDINGS FOR SALE IN LOS ANGELES

SO MANY OFFICE BUILDINGS FOR SALE IN LOS ANGELES

By Jodi Summers

Some reports are showing that we have as much as 14% unemployment in California, so incase you were wondering, that’s why the office market sucks a big one these days.

Notice that the number of office properties for sale is up 67% - there are now 150 multiunit properties on the market, while sales are down by 50% - yes only two sold in September.

A recent property analysis by Cushman & Wakefield noted that net absorption of office space totaled negative 1.6 million SF in LA County in the 2nd quarter of 2009 and negative 5.6 million SF year-to-date. FYI, this compares to negative 2.9 million SF in all of 2008.

The freaky thing is that despite the job losses, Los Angeles County continues to maintain one of the lowest office vacancy rates in the nation.

On the investment side, recorded office sales volume of $45.1 million in L.A. County in the second quarter, compared with $245 million the previous quarter and $3.7 billion for the year 2008. The average sale price fell to $171 per square foot in the second quarter, versus $220 per square foot in the first quarter of 2009 and $323 in all of 2008.

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http://www.cityfeet.com/News/NewsArticle.aspx?Id=33884

http://www.clarusresource.com/

LIQUIDATING CORPORATE ASSETS – COMPANIES ARE LOOKING FOR SALE-LEASEBACK TRANSACTION

LIQUIDATING CORPORATE ASSETS – COMPANIES ARE LOOKING FOR SALE-LEASEBACK TRANSACTION

Sale-leaseback transactions are back in vogue. With the tenuous economy, businesses of all types are interested in sale-leasebacks as an avenue to monetize their assets.

In the wake of the lending crisis, banks have sold off their retail branches and office buildings in response to declining capital positions. Locally, Countrywide Home Loans sold the office building at 5220 Las Virgenes Road in Calabasas, CA, to digital technology developer DTS, Inc. for $15.64 million or $182 per square foot. The sale is a partial sale-leaseback; with Countrywide continuing to occupy 59,457 square feet of the 85,948-square-foot building.

CoStar reports that sale-leasebacks were about 2.2% of all closed transactions by dollar volume in third-quarter 2007, totaling about $2.1 billion. During the same quarter last year, those transactions had doubled as a percentage of total sales volume to 4.4%. Notably, third-quarter 2008 was the strongest of the year for sale-leasebacks and among the strongest on record.

“Sale leasebacks are still a bright spot in the real estate market right now,” noted Bruce Westwood-Booth, managing director for Jones Lang LaSalle’s Corporate Capital Markets Group. “Volume was very strong last year and we had another record year in that area. Whether we’re just picking up market share or whether our clients are more interested, it’s hard to say….but pricing has been impacted, so we’re also seeing a rise in cap rates.”

Private investors acquired the industrial buildings at 2255-2267 Agate Court in Simi Valley, CA, from Turbonetics for $5.35 million, or $153 per square foot. The seller, a turbo systems manufacturer, will continue to fully occupy both buildings. The industrial facilities total 34,875 square feet and were constructed in 1985 in the Moorpark/Simi Valley Industrial submarket.

Jay Koster, managing director of Jones Lang LaSalle’s Corporate Capital Markets practice, predicts a significant sharpening of the corporate appetite for sale-leasebacks in 2009. He notes that inquiries from the firm’s corporate clients are up by 300% versus 18 months ago.

“Corporations are looking for capital capacity to operate their businesses and position themselves to take advantage of opportunities that will arise through this market cycle,” Koster noted. We expect that appetite will be matched by heightened demand from investors that recognize inherent value in real estate leased to strong-credit corporations.”

JLL predicted an increase in corporate sale-leasebacks last year — “and that trend will absolutely continue [in 2009] as corporations remain challenged in securing new sources of capital,” added Kenneth Rudy, Jones Lang LaSalle’s president /COO. “Investors are more willing to commit capital to acquire companies’ owned assets tied to long-term, credit leases. We also expect to see more corporate dispositions to come from downsizing in 2009 as corporations mark-to-market the value of surplus real estate inherited in acquisitions at market clearing prices.”

All the dirt @

http://www.costar.com/News/Article.aspx?id=8BF2590E41B392530B05DF90ACC7A547&ref=100&iid=116&cid=383F14EEE265B182474DA2442BACBBBF

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OFFICE BUILDING BLUES

By Jodi Summers

The office market may be in pain Los Angeles but it’s a minor ache compared to the severe hurt other parts of the country are feeling.

Office prices have declined more than 20% this year in some parts of the country, according to the first quarter reports by Moody’s/REAL National All Property Type Aggregate Index. The index’s monthly decrease was 1.7%, and the index showed a year-over-year decline of 20.8% from March 2008. Fortunately, Los Angeles, being a Top 10 market has not seen the office market dive that deep.

“The national office market was down 18.6%” in Q1 2009 compared to Q4 ’08, Real Estate Analytics president Neal Elkin observed. “That was well beyond what you’d expect in one quarter…I personally underestimated how poorly the secondary and tertiary markets are doing, particularly in the office space.

“Comparing these national and top 10 office returns over the past quarter and the past year, that’s shocking. If the top 10 markets are down 6.8% and nationally it’s down 18.6%, which means the secondary and tertiary markets are down close to 30%. That’s an enormous drop in price over one quarter.”

It has been speculated that the sharp decline in the office sector is due in large part to investors who speculated in the office market. Overall, office property prices have declined 30% from their peak in October 2007, according to Real Capital Analytics. Regionally, the largest falloff was in the West, where prices sagged by 16%.

Speculation has in that the drop in the secondary and tertiary markets is due to the softening creditworthiness of the tenants, while in the primary market you’ve got a deeper tenant pool, higher quality tenants, and there’s a bigger lag time in tenant turnover.

Overall, selling prices for retail properties are off 13% from the October ’07 peak. Apartment and industrial prices remained flat during the quarter, although Western apartment prices gained by 2.7%. Sales volume for the market overall shows that both total dollar value and number of sales are down about 75% to 80% lower than the volume seen at this time last year.

http://www.globest.com/news/1421_1421/newyork/178955-1.html?type=pf

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http://fb.invisiblethreads.com/the_kodak_moment

http://www.pilkington.com/applications/case+studies/usa/grupe+brookside+office+building+stockton+california.htm

STRANGE TIMES MAKES FOR STRANGE TRANSACTIONS

STRANGE TIMES MAKES FOR STRANGE TRANSACTIONS

by Jodi Summers

As you’re aware, the New York Times Co. recently sold its portion of its headquarters building at 620 Eighth Ave. to investment firm W.P. Carey & Co. and two affiliates in a $225-million sale-leaseback. In this custom-crafted transaction, W.P. Carey bought the 21 floors, totaling 750,000 square feet, which the Times Co. uses as headquarters space. The transaction does not include the six floors which the Times Co. leases to other tenants.

In another unique transaction, Global information technology firm Unisys Corp. disposed of a 356,000-square-foot suburban Philadelphia office property in a $19.5-million sale-leaseback transaction with Exeter Property Group and Strategic Realty Investments LLC.

Interesting to note that in this transaction,  Unisys leased back only about half of the space at the Malvern, PA asset. Partial sale-leasebacks aren’t an entirely new phenomenon, but they appear to be on the rise, at a time when increased interest in sale-leasebacks in general are up.

“A lot of corporations have identified that using a sale-leaseback is a great way to take capital they have tied up in real estate and invest that in their business,” says Jones Lang LaSalle capital markets senior vice president Suzanne Martinez.

In many instances, flexibility is a key motivator behind companies pursuing partial sale-leasebacks, Martinez notes. In the case of Unisys, “doing a partial sale-leaseback in this instance allowed them to lower their operating expenses, and at the same time capitalize on the fact that that was great real estate in a good market.”

Motorola’s five-building, 1.1-million-square-foot Arlington Heights campus in suburban Chicago are being sold either as a portfolio or individually. As part of its right-sizing effort, Motorola will continue to occupy three buildings with long-term staggered lease terms.

Given the inherent repositioning aspect of partial leaseback deals, traditional sale-leaseback investors are not typically attracted to these kinds of transactions,  observes Martinez. Rather, value-add players are the more likely bidders, but they are attracted to having a stabilized rental income stream component while repositioning efforts for the remainder of the space are undertaken.

Market experts foresee that sale-leasebacks will be an increasingly used corporate real estate strategy this year as companies look for ways to shave costs, raise capital and otherwise strengthen their balance sheets.

Expect  to see sale leaseback transactions trickle down into small business. Bill Reynolds recently sold off a 6-tenant automotive facility in Gardena, keeping one space for his muffler supply business. “I did a seller-carryback,” he offers. “The ongoing cash flow is nice.”

New York City-based market research provider Real Capital Analytics notes in its February Capital Trends Monthly reports that owner/occupiers are likely to be parties to an increasing share of transactions this year, both as buyers and sellers. On the sell side, “the increase in deal making stems not only from dispositions of excess/vacant property, but also from sale-leasebacks,” RCA notes. “For some companies, sale-leaseback may be the preferred–or only–method for raising capital at present.”

http://www.globest.com/news/1365_1365/insider/177413-1.html

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http://www.nytimes.com/2009/03/10/business/media/10paper.html?_r=1

http://www.globest.com/news/1362_1362/newyork/177327-1.html

http://www.loopnet.com/xnet/mainsite/news/news.aspx?DocID=6755&sourcecode=1lntd009

THE DECLINING LENGTHS OF OFFICE LEASES

THE DECLINING LENGTHS OF OFFICE LEASES

Call it another sign of evolution. The real estate news authorities at GlobeSt.com have

reported that the length of office lease terms has declined over the years, from 20 years to 12 years to seven…changing the nature of office building ownership.