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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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