Absorption Fails to Put Dent In Area Saddled With Space

San Fernando Valley

By TRAVIS PURSER

Contributing Reporter

More office space is sitting empty in the San Fernando Valley this year compared to last year, even though tenants leased more space than they vacated in the second quarter, the first time there has been positive net absorption since the second quarter of 2001.

Second-quarter vacancy rates jumped to 15.5 percent, compared with 11.6 percent for the like period a year ago, according to Grubb & Ellis Co.

Net absorption, however, rose to 64,410 square feet in April through June, compared to negative 68,768 square feet in the first three months of this year and negative 256,119 square feet in the last three months of 2001.

The absorption figures, while promising, pale next to the valley's total inventory of 25.6 million square feet of rentable office space, according to Tom Festa, a Grubb & Ellis senior vice president. "There's nothing earth-shattering. "To me, it just shows that tenants aren't leaving the market.

"There is very, very careful expansion," he allowed. "It's not gloom and doom. Most of us are of the opinion that we've seen the bottom. But the question is how fast will the recovery come?"

So far, the numbers don't offer any help answering that question.

With the slight increase in demand came a small bump in the average rent landlords sought. For prime space, it was $2.30 a square foot, up from $2.27 in the first quarter, but still less than the $2.36 for the second quarter of last year.

Some valley areas fared better than others. The second-quarter vacancy rate in the Central Valley, which includes Sherman Oaks, Encino and Van Nuys, fell to 12.6 percent, from 13.6 percent from the first quarter. The East Valley, including Studio City, Universal City and North Hollywood, had a vacancy rate of 15.9 percent, down two percent from the first quarter. Those two submarkets saw no new office construction in the last three months.

Vacancy rates in the traditionally healthy West Valley remained mostly unchanged in the second quarter at 15.8 percent, compared with 15.7 percent in the previous three months. The West Valley encompasses Woodland Hills, Calabasas, Chatsworth and Northridge. Tenants continued to vacate property more than they leased, but the situation improved slightly with a negative absorption of 14,523 compared with 33,546 in the first three months of the year. The West Valley was the only submarket in the area to see new construction in the last three months.

Lackluster numbers

The numbers failed to inspire Bill Inglis, senior vice president at CB Richard Ellis Co. "Maybe the illusion is demand is picking up, but (potential tenants) come by, they take a look, and they disappear," he said. He thinks that tenants, perhaps anticipating good deals in the future, are shopping around now, even if their current leases are nowhere near expiring. "There is going to be more pressure on landlords as the year progresses to reduce rent," he said.

Several factors are holding down rents, said Inglis. Many subleases are available now and more will be on the market by the end of the year as businesses continue to downsize. Also, in the face of public scrutiny of corporate ethics, tenants are reluctant to expand as the overall business climate has been uncertain.

"This is my third major cycle in the business. I know it will bounce back, but we need corporate America to bounce back first, and that might take awhile," Inglis said.

The Valley, however, did see L.A.'s largest deal in the second quarter with Douglas Emmett Realty Advisors' agreement to buy the Warner Center Plaza for $350 million from Warner Center Properties. SunAmerica financial services renewed a lease with Warner Center Properties at one of the Plaza towers for 96,000 square feet of space and added 46,000 square feet to the lease.

Bryan Lewitt, a broker at CRESA Partners, has noted a reluctance from big corporations to make decisions concerning property. "I see the market as very static, as very nonchalant, right now," he said.

San Fernando Valley

Major Events:

- Douglas Emmett Realty Advisors agreed to buy Warner Center Plaza for $350 million from Warner Center Properties.

- SunAmerica financial services renewed a 96,000-square-foot lease and took on another 46,000 square feet at Warner Center Plaza for 10 years at $50 million.

- Science and Applied Technologies signed a 10-year, $23.5 million lease with Lennar Partners property management for 74,000 square feet in the LNR Warner Center in Woodland Hills. Construction of a new building for the lease is scheduled to begin this month.

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