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Los Angeles office and condo property development markets hit by lack of finance

According to real estate analysts the office market, one of the largest in the US, is particularly vulnerable as budget conscious companies are looking to trim property costs.

Already-declining demand for office space in the Los Angeles region is expected to accelerate, according to Whitley Collins, senior managing director of the Los Angeles region brokerage for Jones Lang LaSalle Americas Inc.

He sees a worst-case scenario in which metropolitan area companies over the next 12 months could put as much as 10 million square feet of office space back on the market and rents could decline by as much as 25%.

The Los Angeles metropolitan area, home to about 10.7 million people, with its mix of entertainment and media companies, professional-service firms and aerospace concerns, has found its exclusive enclaves are not immune to the downturn.

As more building owners feel the pinch of declining rents and falling values, brokers are now watching the horizon for a potential increase in foreclosures on office properties, according to J.C. Casillas, assistant vice president for Grubb & Ellis Co.

The crisis is also affecting the commercial and condo sector. A high-profile British developer has defaulted on a $365 million loan for prime land it bought in Beverly Hills last year as part of a plan to build luxury condominiums.

The CPC Group Ltd, founded by Christian Candy of London's Candy & Candy development-management firm, has been hit by the collapse of its partner in the project, Iceland's Kaupthing Bank, which was taken over by the Icelandic government. It also faces a tightening of the construction financing as banks have pulled back from a fast-deteriorating market.

CPC sought to modify or extend its loan, which matured early this month. But its efforts faltered, and Banco Inbursa SA of Mexico, acting for a group of creditors has filed a notice of default in the office of the Los Angeles County registrar.

The move is the first step toward foreclosure, though it doesn't preclude the parties from continuing negotiations toward salvaging the project. A nearby condo tower has been put on hold because of funding issues resulting from the collapse of Lehman Brothers.

It is a sign of the times. Developers often take out short-term land loans with the expectation of replacing them with a construction loan. That replacement financing has dried up.

'These sites are as the best yet even these deals are being dragged down. It is almost impossible to secure construction finance,' said Lewis Feldman, a real-estate lawyer with Goodwin Procter in Los Angeles.