Buckley, who tracks vacancy rates in the LA Basin, told GlobeSt.com that the latest market analysis shows that about 1.3 million sf of space is available on the Westside and 756,784 sf is available in the South Bay.
Much of this available space is sublet space, which doesn't directly affect owners because someone is still paying the rent. However, the presence of so much sublet space on the market has thrust owners into the position of competing for tenants, notes Buckley, who says that demand by tenants looking is down significantly, as well. Still, he says, there's still large, creditworthy tenants--"great tenants"--seeking space, but they're are waiting to see what the real estate market will do before making a commitment. "Large tenants are positioning for the future to take advantage of large blocks of space at favorable rents," Buckley adds.
He notes that rent rates are holding because new and recently completed product had been pre-leased; however, that could change. "We're in a transition right now, and savvy owners are now willingly to make concessions for strong, creditworthy tenants," he continues.
Jerry Holdner, VP of Market Research for Voit Commercial Brokerage in Orange County concurs. Holdner, who tracks 87.2 million sf of space in buildings of 2,500 sf or more, says that owners are now willing to negotiate to land the right tenants--those with a good balance sheet and strong business plan--for free rent and tenant improvement dollars. "It's still an owner's market, but that's shifting," he says, noting that the office vacancy rate in Orange County is up 1%, but when sublet space is added in the rate is double that.
Buckley says that some companies subletting space are requiring Recognition Agreements from building owners, which basically says that if the lessor goes bankrupt, the owner agrees to continue to rent the space to the tenant.
Additionally, Holdner notes that some owners are letting failed companies out of leases--usually for a nominal fee of a few months rent--with the hope of filling the space at a higher rate. A case in point, was when IXL, a high-tech firm, vacated 100,000 sf at Arden Realty's Howard Hughes Center and Havas Interactive, a division of Vivendi Universal, agreed to take the space for a higher rent. Havas was "unwilling to get in bed behind IXL," recalls Buckley, so Arden took IXL off the hook and wrote a new rental agreement with Havas.
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