Market Erosion Continues, Led by West Valley Decline

San Fernando Valley Business Journal

The San Fernando Valley office market eroded considerably in the fourth quarter of 2001, with every submarket showing signs of strain.

The amount of space absorbed fell into negative territory in the Central, Eastern and West Valley, as vacancy rates dipped by several percentage points and more for some locales.

Even the one bright spot, a seeming stability in rental rates, was more likely due to the lack of leasing activity during the period rather than any pockets of strength.

"It's just the trend of the times," said Bill Inglis, senior vice president at CB Richard Ellis. "There's a lot of downsizing, cutbacks and people that can no longer weather the storm need to shut down and reorganize their business."

Vacancy rates in the West Valley, traditionally the most robust of the region's submarkets, took the biggest dive in the fourth quarter, plummeting to 17 percent from 13.9 percent in the third quarter of 2001, according to Grubb & Ellis Co.

Net absorption in the West Valley declined to negative 162,000 square feet from negative 116,329 square feet in the third quarter of last year, a larger drop-off than can be accounted for solely because of Health Net's phased relocation of its 300,000 square foot headquarters.

Vacancy rates in the West Valley, which includes Woodland Hills, Calabasas, Chatsworth and Northridge, climbed steeply over the like period in 2000 when rates hovered at 9.6 percent.

The East Valley, which includes Studio City, Universal City and North Hollywood, saw vacancy rates rise nearly 3 percentage points to 16.3 percent over the third quarter of the year, according to the Grubb & Ellis data.

The Central Valley, including Sherman Oaks, Encino and Van Nuys, saw less erosion than other submarkets in the fourth quarter. Vacancy rates there hit 12.4 percent, from 11.7 percent in the third quarter of 2001.

Brokers said that the less dramatic drops in the area are likely due to the types of tenants in those offices.

Smaller requirements

"When you think about the Sherman Oaks/Encino marketplace, those are typically 3,000-square-foot or 5,000-square-foot tenants," said Brian Hennessey, vice president with Grubb & Ellis. "Those guys can downsize from 6,000 to 3,000 feet, whereas if the big guys are shutting down, (they're leaving) 30,000 square feet."

Hennessey said one large insurance company he is working with hopes to downsize from its current 30,000 square foot space to about 8,000 square feet, a move that would have a greater effect on the marketplace than would a similar decision by a smaller tenant.

Unlike the Westside, the Valley has not seen large companies simply shut their doors and leave huge vacancies in their wake. But the absorption figures throughout the region indicate that even the smaller downsizing efforts and closures took a dramatic toll as the year came to an end.

Year-to-date, the Central Valley experienced negative absorption of 293,504 square feet, and in the East Valley, tenants vacated 209,322 square feet more than they leased. For the year, the West Valley experienced negative absorption of 313,353 square feet.

The office rental rates for the quarter do not reflect the slowdown in leasing activity, but brokers attribute the apparent stability in rents to the sheer paucity of deals during the period. In fact, brokers say, landlords have loosened rental rates significantly in recent months.

"You're starting to see more free rent being offered," Hennessey said. "The amount of sublease space being dumped on the market is having an impact on direct space, and the landlords are starting to give free rent to appear more attractive."

In some submarkets, tenants who have been forced to vacate space are offering it up for sublease at $1.50 a square foot or less in an effort to recoup at least some of their costs.

Major Events:

- Meridian Health Care Management Inc. inked an 80,000-square-foot lease deal in Warner Center. The eight-year lease was valued at more than $17 million.

- Entertainment Lighting Services acquired a 69,582-square-foot industrial building at 11440 Sheldon St. in Sun Valley for $4.1 million.

- Quest Diagnostics leased 36,346-square-feet at Harman International Business Campus in Northridge. The three-year lease was valued at $2.8 million.

- Travel company Brendan Tours Inc., acquired a 40,000-square-foot facility in Chatsworth for $3.7 million.

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