Staff Reporter

Last year at this time, brokers and property managers looked out over the horizon of business parks in the West San Fernando Valley and thought that the sky was the limit.

With the economy expanding and vacancy rates at an all-time low, rents already had started to climb, and many were projecting rent increases in excess of 15 percent through the end of 1999.

But that optimism is waning fast. A number of new projects due to come on line beginning next year, coupled with several major corporate relocations being planned, will dump more than 1 million square feet of office space on the West Valley market by the end of next year. That's three times the amount of space absorbed in 1998, and double the rate of absorption in 1997.

Because the space opening up will not be available all at once, some brokers and developers say they see little cause for concern. But others point out that with so much space coming on line, the once-heady predictions for the market now seem overstated.

Real estate executives say it looks like office space will remain on the market longer, and there's little likelihood that lease rates will rise above current levels.

"I don't think the market is going to get awash in space, but it's not going to be a landlord's market," said Jerry Katell, president of Katell Properties, which recently scrapped a plan to build an office complex in the Warner Center area. "It's going to be hard to get those $2.50 and $2.75 (monthly per square foot) rents."

The new space is rolling out after years of decreasing availability and increasing demand. For nearly seven years, there had been virtually no new development in the West San Fernando Valley.

Last year, West Hills Corporate Village came onto the marketplace, driving up the office vacancy rate to a current 14.3 percent. Before that project arrived, office buildings in the area had been running at vacancy rates below 10 percent, brokers said. With so tight a market, those seeking blocks of space of 25,000 square feet or more had few options, and monthly rents climbed from an average of $1.85 per square foot a year ago to as much as $2.25 for some class-A buildings in Warner Center.

But beginning in the first quarter, brokers and landlords began to see resistance to the higher rents, and leasing activity began to slow considerably. At the same time, developers began stepping up new construction, changing the outlook for the next year.

"(Office rents) will go up a little, but I think we've about reached where it's going to be," said Bill Inglis, vice president with CB Richard Ellis Inc. "The reason is because of this specter of space coming on line. That will keep the (rental) rates in line through the first half of 2000."

A number of brokers and developers argue that the development underway represents a cross-section of the market, and is not all directly competitive. They reason that with different types of properties becoming available at relatively staggered times, the new development will drive up interest in the area rather than create a glut of space competing for tenants.

"It's actually good for the market to have different kinds of space because we'll be able to attract different tenants into the market rather than everyone having class-A space at higher rates," said Kevin Read, vice president of acquisitions for Lennar Partners, which expects to complete the first phase of its LNR Warner Center complex later this year.

Tishman International Cos. is proceeding with plans to charge $2.50 to $2.60 a month per square foot for its upcoming high-rise. Tishman officials believe that the amenities of their brand new, state-of-the-art building, along with the services and labor pool available in the immediate area, will lure tenants.

"When you price something and you're leading the market, you don't want to be arrogant," said Alan D. Levy, Tishman's chairman. "But on the other hand, we know the rent we achieved with 20th Century, and they're no fools. We think that's the market."

But recent events have shown that tenants may perceive less difference between the various properties than do the landlords. Sterling Software will relocate to a 135,000-square-foot facility in West Hills Corporate Village, where the rents are running at well under $2 per square foot and parking is free.

Sterling officials declined to comment, but others point out that despite the strong economy, tenants have become more vigilant about keeping costs under control. That, as much as anything, is dictating leasing decisions.

The lower rental rates available at the West Hills developments have helped Regent Properties get tenants signed to leases for 400,000 of the 590,000 square feet of space available in its recently completed Corporate Village.

Until the major Warner Center projects are complete, the Regent project and soon-to-be-completed Trammell Crow project are the only game in town for users who need 20,000 square feet of contiguous space or more. With that space being available so much sooner and more affordable than the new Warner Center projects, it may be tough for the Warner Center projects to attract tenants.

"Competition just forces market efficiency, and that's what we're going to see," said Mark T. Sullivan, senior managing director for Julien J. Studley Inc.

Officials at Trammell Crow Co., which is redeveloping 380,000 square feet of space at Corporate Pointe at West Hills with a completion date in the fourth quarter, said they are getting inquiries from Warner Center tenants, although no deals have yet been completed.

Even at Warner Center, where the vacancy rates are so low that the largest block of space available is a mere 12,000 square feet, there's an increasing awareness that rents may have gone as high as possible for now.

"We feel we've pushed rates as far as we can," said Donald W. Hudson Jr., senior vice president and director of leasing for Warner Center Properties, a manager of major buildings in the area. "We need to solidify more deals before we can arbitrarily move onto a higher rate structure."

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