VALENCIA–Valencia Failing to Lure Tenants to Major Office Projects

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A spurt of development in the past two years has sent office vacancy rates soaring in the Santa Clarita Valley and dampened once-bullish expectations for the region.

As a result, some developers are dropping lease rates, while others are even considering unloading their property.

In 1999 alone, more than 450,000 square feet of office space was built in Valencia, but thus far it has failed to attract the types of large tenants that developers had hoped for. The office vacancy rate now stands at 34.8 percent, according to Grubb & Ellis Co.

Although vacancies have been climbing in Valencia’s office sector since late 1998, the amount of space absorbed had been increasing as well. But with leasing activity now at a virtual standstill, absorption has slowed considerably. In fact, Valencia office tenants vacated 8,604 more square feet of space than they moved into during the first quarter of 2000.

“There’s just too much square footage here at one time,” said William R. Boyd Jr., senior vice president at Grubb & Ellis.

Brokers and developers said they have seen some increase in tenant interest in Valencia’s office market in recent weeks, although they conceded that no leases have been signed. Boyd said the building he represents, Explorer Business Park, which has a 42 percent vacancy rate, has dropped its lease rates as a result.

And Arden Realty Inc., which owns a 215,000-square-foot office building at 27200 Tourney Road, is considering divesting that property, although officials said no “hard-and-fast decisions” had been made.

“The psychological barrier of having to go over that last hill (to get to Valencia) is just tremendous,” said Brig Troy, senior vice president at Arden. “Our experience with tenants is they look at it, they think it’s lovely, and they say it’s too far away.”

Building boom

Anxious to cash in on what appeared to be a booming real estate market in Valencia, developers several years ago began building and renovating office properties. Last year, 461,437 square feet of space was completed, largely in three buildings, according to Grubb & Ellis.

In addition to the Arden property, which had been renovated, and the 120,000-square-foot Explorer Center, PacTen Partners completed the first phase of its Valencia Corporate Point development, a 180,000-square-foot office building. PacTen officials did not return phone calls, but real estate sources said no leases have been signed there as yet.

Developers had reasoned that support services from graphics to accounting would follow the large numbers of businesses that have already moved to industrial facilities in Valencia, creating an increased demand for office space.

Their expectations were bolstered further when Princess Cruises decided to relocate its corporate headquarters to Valencia a move that, combined with an earlier decision to house the company’s customer service division in Valencia filled a total of 260,000 square feet of office space.

But with the exception of Princess and Explorer Insurance, another newcomer to Valencia, few large tenants have materialized.

Unlike the industrial sector, where tenants last year absorbed a record 1.6 million square feet of space mostly as a result of migration from the San Fernando Valley, office tenants have been reluctant to make the move north.

“It’s a different story if you talk industrial vs. office,” said Greg Barsamian, a broker with CB Richard Ellis Inc. “You have very little supply of industrial space in the San Fernando Valley. For office space, you have lots of alternatives.”

Industrial tenants have also relocated in Valencia because amenities in the newly built manufacturing and warehousing facilities there are not available in older San Fernando Valley buildings. But unlike the industrial sector, office construction has continued in the San Fernando and Conejo valleys, creating many more options for office tenants.

“It certainly felt as if there was some momentum (in the Valencia real estate market),” said Troy. “And there were other large tenants who were looking in that market. The problem is you have to think far in advance, and sometimes you don’t catch the wave.”

Many brokers and others believe it’s just too early to see significant growth in Valencia’s office market.

“Right now, when you look at the Valencia office market, the majority of tenants are under 10,000 square feet, and that’s usually what you see in the early stages of market development,” said Craig Peters, senior vice president with CB Richard Ellis, who handles land sales in the area for Newhall Land and Farming Co. “It’s not really that different from what the industrial market out there went through 10 years ago. Now you have an industrial market that’s established, and that is what the office market in Valencia will mature to over the next five years.”

Overcoming obstacles

But Valencia has other obstacles to surmount, besides its youth, before it can attract the kinds of large tenants that make up so much of the office market in the San Fernando and Conejo valleys, real estate experts said.

Other communities have built a commercial real estate base in specific industries. For the West Valley, it was the insurance industry. The Conejo Valley has become a mecca for high-tech companies, and the entertainment industry clustered in the East Valley. But so far at least, there are no such commonalties in the big companies that have migrated to Valencia Princess Cruises, Explorer Insurance and U.S. Borax to help define Valencia’s business community.

In addition, Valencia’s office tenants so far are the kinds of labor-intensive, back-office businesses that lack the prestige that often pulls other companies to an area.

And while development in the Conejo Valley has been helped along by the large number of corporate chiefs who live in the area, Valencia does not enjoy the same advantage.

“While the Santa Clarita Valley has a great labor base and wonderful housing for mid-level and some upper-level management types, it really hasn’t been the locale for the folks who own the company or the highest executives,” said Jim Lindvall, senior vice president with Grubb & Ellis. “Those are the folks who drive the real estate deal.”

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