Real Estate Downturn Finally Arrives in West Los Angeles

Summary

- The West Los Angeles commercial real estate market, once considered bullet-proof due to its strong fundamentals, is hit hard by the recession. - The Westside market experiences its first negative absorption in five years, and rental rates, which had gone up in the face of declining absorption, drop for the third consecutive quarter. - The declining market forces lenders to take back a $1.5 billion portfolio of office buildings in West Los Angeles and surrounding areas.

Analysis

The once white-hot West Los Angeles office market has turned cold as demand slows and companies reduce office space needs. Vacancy rate jumped by 130 basis points to 10.8% in the final quarter of 2008 and is up a hard to believe 280 basis points over the same time period one year ago. Asking rates that were once approaching $7 per square foot in some submarkets are down as much as 30-35 percent, as demand dwindles and tenants reevaluate their space needs.  Furthermore, the market experienced its first full-year negative absorption, losing over 1,050,000 square feet during 2008. 

Looking forward towards 2009, economic pressures from the recession will not bode well for the West Los Angeles office market, especially in financial heavy markets such as Century City. Sublease space will become increasing prevalent, further increasing vacancy and putting more downward pressure on overall asking rates.

The downturn has already claimed its first major victim.  In mid-2007, at the height of the real estate boom and right before the onset of the subprime fiasco, Cabi Developers, the US arm of  GICSA, Mexico’s largest developer, bought a portfolio of 33 office buildings in Southern California from Arden Realty for $1.5 billion, with approximately $1.350 billion in debt.  Following Cabi’s inability to make principal payments required under the terms of the financing, Hines Interests of Dallas, which had acquired portions of the underlying debt, bought the portfolio in lieu of foreclosure for the face value of the debt, which is approximately $1.4 billion. Many of the “jewels” of the portfolio are in West LA and Santa Monica.