By Jodi Summers

Last year was an incredible year for office building purchases. Across the country, $99.7 billion of office properties traded hands — a 34 percent increase over 2004, and more than one-third of the $268 billion in investment grade commercial real estate transactions in 2005. Locally, buyers spent close to $5 billion on office buildings in LA County last year — up from $4.2 billion in 2004, which was 6 percent more than 2003, and double the 2001 figure, according to Cushman & Wakefield Global Real Estate Services.

“There have been gobs and gobs of money thrown at commercial real estate,” says Nicolas Buss of PNC Real Estate Finance.

Southern California has the tightest industrial market in the U.S., and a rapidly tightening office market. The challenge is demand versus supply. There is not enough land available for new commercial development to accommodate business growth. Still, we try. There were a total of 252 major expansions in the five-county region during 2005, according to the Los Angeles County Economic Development Corp (LAEDC).

Office vacancy rates have been declining across the Los Angeles five-county region since the second quarter of 2004, a period when businesses started hiring more employees. Among the growing white-collar businesses in Southern California are law, accounting, banking and management consulting — more employees equals the need for more office space. Between fourth quarter 2004 and fourth quarter 2005, LA office vacancy rates dropped from 14.8 percent to 11.2 percent; Orange County dropped from 10.7 percent to 7.2 percent; Riverside-San Bernardino counties went from 9.5 percent to 7.0 percent; and Ventura County was down from 11.2 percent to 9.0 percent a year ago.

The LAEDC has calculated office space need by industry sector: “Professional services,” which includes accounting, law, architecture and engineering, as well as personnel services, posted 52 major expansions in 2005, up from 41 in 2004. “Logistics” had 26 major expansions, down from 34 in 2004. The “finance and insurance” industry had 12 major expansions in 2005, down from 27 in 2004. The “entertainment industry” had 11 major expansions in 2005, down from 12 in 2004. “Apparel and textile” had 10 major expansions, down from 14 in 2004. “Aerospace/defense” and “hi-tech” both had nine major expansions compared to 10 during 2004. Three of Southern California’s major projects in 2005 were out of state relocations from Colorado, Nevada and Texas — up one development project from the year prior. Foreign firms accounted for 18 major office expansions during 2005, unchanged from the previous year. The expansions came from Australia, Canada, Chile, Germany, Japan, South Korea, Sweden and United Kingdom.

“The overall economy is continuing to grow, and a lot of the growth is coming in sectors that are big users of office space,” said economist Jack Kyser of the LAEDC.

Cushman & Wakefield reported that at the end of the first quarter of 2006, asking rents averaged $2.14 per square foot per month, up 9 cents from the first quarter in 2005. By the end of the year, the National Association of Realtors predicts that office vacancy rates will be around 11 percent nationally, with rates dipping as low as 5 percent in parts of Southern California.

Meanwhile, for those buying and selling office buildings, prices on average have soared above $200 per square foot. The Los Angeles Times reports that the average price per foot for office buildings rose to $196 in 2004, up from $156 in 2003. Prices downtown hit $350 a foot this year. Sale prices are well above $400 per square foot in downtown Santa Monica.

Nationwide, the National Association of Realtors reports that office rate vacancies were 12.6 percent for the first quarter of 2006, predicted to drop down to 12.1 percent for the second quarter. This is the first time since the summer of 2001 that the national office vacancy rate has dropped to under 13 percent.

Options are still sizable for a small-business tenant who uses less than 5,000 square feet, “but companies that need more than 50,000 square feet will have very limited choices,” said Jerry Porter of Cresa Partners, tenant representatives.

The LA Times stated that downtown’s vacancy rate fell to 14.6 percent from 16.3 percent in the first quarter and rents climbed 24 cents to $2.29. Other markets including Pasadena and the San Fernando Valley also have tightened. Average monthly asking rents in Santa Monica were the highest in the county at $3.61 per square foot, a 26 percent increase from a year ago. The vacancy rate fell to 4.6 percent from 7.5 percent a year ago.

“We are going to be in a much stronger landlord market for the next 24 to 30 months until more space comes on line,” Porter noted.

Landlords like the Inglewood-based Trizec Properties Inc. are expected to raise rents and reduce concessions, said Trizec vice president Patrick Lacey. Trizec has just taken title to several large Westside office buildings, which it is purchasing from Arden Realty Inc. as part of a $1.6-billion deal.

“We bought into that market because we saw that’s where the growth is going to be,” Lacey said.

New development is modest and will not accommodate demand. The Construction Industry Research Board noted that during 2005, industrial building permits valued at $755.8 million were issued in the five-county region. Los Angeles County’s industrial building permit value was $277.4 million; Orange County’s total was $26.9 million; and Ventura County had $20.1 million in industrial permits. The Inland Empire had the biggest industrial building permit total: $431.5 million.

“Gross and net absorption reached five-year highs in most markets across Southern California during 2005, contributing to declining vacancies and increasing rents throughout the region,” said Erika Gjovik, director of research for GVA DAUM. “As continued job growth is forecasted for Southern California in 2006, we expect vacancy to hover near the historically low levels reached during 2005.”

For more on Southern California commercial properties, there is a great information blog at www.socalindustrialrealestateblog.com.

(Jodi Summers is director of the investment division at Boardwalk Realty Santa Monica. For your real estate needs, e-mail Jodi Summers at jodis@boardwalkrealty.com, call 310-309-4219, or visit www.santamonicalandmarks.com.)