Slow Construction, Low Rents Spur Rise in Submarket Activity

Contributing Reporter

Is the San Fernando Valley office market on the upswing?

Vacancy rates dipped across the Valley floor to 12.4 percent in the first quarter, down from 13.1 percent in both the previous three months and the like period a year earlier, according to Grubb & Ellis Co.

With Class-A asking rents mostly flat, and little new construction in the pipeline, leasing brokers are pointing to recovery signs across much of the sector.

"The numbers from this quarter indicate a firming-up across the sector," said David Solomon, vice-president at CB Richard Ellis in Sherman Oaks. "Looking back over the last year, absorption was inevitable."

Solomon said that the lack of new construction, coupled with dropping rents, have encouraged firms to snatch up vacancies. "There's 18 million to 20 million overall square feet in the Valley, " he added. "With nothing new coming online, save for the LNR Warner Center project, it was only a matter of time before absorption finally spiked."

Solomon's first-quarter deal for Image Entertainment Inc., an entertainment licensing and distribution firm, influenced West Valley absorption, which checked in at positive 145,572, up markedly from the 38,551 in the same period a year ago.

Image Entertainment will take 61,000 square feet of a 500,000-square-foot building at 20525 Nordhoff St. in Chatsworth.

Net absorption was up in the Central Valley submarket, to 132,410 square feet from 18,693 square feet in the previous quarter, and in the East Valley, (6,909, up from negative net absorption of 68,688).

The East Valley continues to be the slowest submarket in terms of leasing. Stacy Vierheilig-Fraser, senior managing director with Charles Dunn Co., said that the submarket Studio City, North Hollywood and Universal City is dependent on nearby entertainment firms. "There's a trickle-down effect when the studios run repeat TV programming or have heavy layoffs in animation," she said.

Sales were stronger than lease deals in the East Valley. Sales in the West Valley included Duesenberg Investment, headed up by billionaire dealman John Anderson, and its purchase of the 122,000-square-foot Gateway Plaza shopping center in Woodland Hills for $54.4 million.

The center, at Ventura and Topanga Canyon boulevards, is fully leased and anchored by Ralphs and PetCo. It traded for $445 a square foot. Only the sale of Glendale Galleria, at $657 a square foot, was higher among major retail centers sold in Los Angeles County during the past few years.

Another significant West Valley lease deal was, Roy's, the Hawaiian fusion restaurant that took 7,000 square feet at 6355 Topanga Canyon in Woodland Hills. Forster said Roy's would occupy the ground floor space in the 160,000-square-foot multi-story Warner Financial & Medical Center. He estimates the 10-year lease to be valued at $2 million.

The West Valley submarket saw the steepest drop in vacancies (14 percent from 15.8 percent) compared with the like-period a year earlier. Absorption will continue to spike in the coming quarters, as the fifth office building constructed in the LNR Warner Center project, "Building G," will top out at 179,000 square feet and will be delivered to market in early 2005.

Building "H" at LNR Warner Center (also 179,000 square feet) was completed in December of 2003 and is 100 percent leased to ATK Missile Systems Co. and Net Zero (68,000 and 111,000 square feet, respectively). ATK occupied the site in December 2003 and Net Zero is anticipated to take occupancy in the third quarter.

The Central Valley submarket, which includes Encino, Sherman Oaks and Van Nuys, had a vacancy rate of 9.3 percent, down from 10.5 percent the previous three months and 11.9 percent for the like-period a year earlier. Rents across the Central Valley inched up just slightly from a year ago, and John Sabourin, corporate managing director with Studley, noted a "dramatic drop-off in landlord concessions" in an office market he describes as "steadily improving."

Major Events:

- Duesenberg Investment bought the 122,000-square-foot Gateway Plaza shopping center in Woodland Hills for $54.4 million.

- Image Entertainment will take 61,000 square feet of a 500,000-square-foot building in Chatsworth in a 10-year deal worth more than $10 million.

- Roy's, a Hawaiian fusion restaurant, will occupy the ground floor space in the Warner Financial & Medical Center, a 10-year lease with an estimated value of $2 million.

- Sunkist Growers Inc. consolidated its Sherman Oaks building in a $1.2 million lease.

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