Trouble Brewing in Some California Office Markets

LOS ANGELES-While most forecasters still predict that California’s economy will enjoy a “soft landing” next year, many commercial real estate owners in the state are already hitting some turbulence.

Dozens of property investors, from San Diego to San Francisco, are beginning to suffer from vacancies created by shrinking demand from dot-com tenants. Meantime, a small but growing number of retailers have begun trimming back their Golden State operations, even as some retail investors struggle to cope with the string of closures triggered by failures in the movie-theater business.

“The current low rate of unemployment, the narrowing of the interest rate spread and the disappointing corporate profits have been pointing to the end of the economic expansion for some time,” says Edward Leamer, an economist at UCLA’s Anderson School of Business. Though the national economy will slow more than California’s next year, he adds, the statewide unemployment rate appears certain to rise and growth here will moderate in 2001.

The dot-com shakeout that started on Wall Street last spring is now spilling over into California’s office market, where dozens of failed or downsizing Internet tenants have put more than two-million sf of their office space up for sublet.

In Southern California, the West Los Angeles market has felt the sting of the closings most of all. Researchers at Julien J. Studley says there’s more than 500,000 sf of prime Westside space now available for sublet, pushing the submarket’s vacancy factor to above 7% from just 3.4% earlier this year.

Even the San Francisco market, which had a vacancy factor as low as 1% throughout much of 2000, is starting to feel the pinch. Its overall vacancy rate has climbed to about 4% in recent months, according to brokerage reports, as struggling dot-coms have placed more than one-million sf up for sublet.

The troubles in the dot-com sector come as even some traditional space-users, particularly retailers, are suffering problems of their own. Earlier this month, home-improvement giant HomeBase Inc. abruptly closed 22 of its stores–nearly all in Southern California–and announced plans to convert its 62 others to home-furniture outlets. Still other retail projects have been hurt by the high-profile bankruptcies of some theater chains, which have raised the region’s overall retail vacancy rate and left many malls and shopping centers without an important avenue to draw visitors.