REAL ESTATE QUARTERLY - San Fernando Valley
'Flight Toward Quality' Marks Area's Office Leasing Activity

By DAVID GEFFNER
Contributing Reporter

Office space absorption improved for some submarkets in the San Fernando Valley, but vacancy rates remained in double digits and asking rents slid lower.

Net absorption for the three major Valley submarkets West Valley, East Valley and the Central Valley totaled 237,652 square feet in the April-June period and 284,891 square feet in the previous three months.

The West Valley submarket paced all other sectors with 199,274 square feet of positive net absorption, a formula that takes into account the amount of space leased versus the amount vacated, up from 145,572 square feet in the previous quarter. The activity brought down the vacancy rate in the area to 10.6 percent, from 14 percent in the prior three-month period and 14.5 percent for the like period a year ago, according to Grubb & Ellis Co.

Transactions were led by Broadspire Insurance Services swallowing up 30,000 square feet at 26541 Agoura Road in Calabasas, and inQ, an Internet sales firm, taking 19,000 square feet at 30501 Agoura Road in Agoura Hills.

In contrast, there was relatively little activity in the other office corridors of the region.

In the Central Valley submarket, led by the Ventura Boulevard corridor of Encino and Sherman Oaks, net absorption totaled a mere 33,345 square feet, down from 132,410 square feet in the previous quarter and 165,755 square feet for the like period a year earlier.

Average asking rents, which had already decreased significantly, took a further dip to $2.03 per square foot compared with $2.04 per square foot in the previous quarter.

The vacancy rate fell to 8.8 percent from 9.3 percent in the previous quarter and 10 percent for the like quarter a year earlier.

In the East Valley, the rate was 13.6 percent, compared with 13.8 percent in the previous quarter and 11.1 percent a year earlier.

The improvement has some brokers optimistic that a sustained recovery in the office leasing market is under way.

"The average weighted vacancy rate for both the East and Central Valley was below 10 percent," said John Battle, principal with Lee & Associates in Sherman Oaks, "so this recovery is moving along nicely."

Average asking rents have ranged from $1.90 to $2.20 per square foot.

Meanwhile, low interest rates have continued to fuel the market for building sales, driving up prices for properties, particularly those under 20,000 square feet.

Second quarter closings in the East Valley included the sale of an 87,000-square-foot building at 6400 Laurel Canyon in North Hollywood. Milan Properties, based in Orange County, purchased the site from Alex Brown Realty in Baltimore for $8.4 million.

Battle, who brokered the deal, said the property traded for $400-$500,000 more than expected due to the lack of product in the East Valley submarket. Investors who have traditionally traded on buying office buildings that lease below market rates and refurbishing them, are finding a dearth of those properties, and those that do come on the market are quickly sold.

"Effective lease rates in North Hollywood are roughly $1.60 per square foot," Battle noted. "With the building only 40 percent occupied, it was a value-added play that's rare for that submarket."

Battle said he has increased tenancy since the sale to 55 percent, bringing in institutional tenants such as the City of Los Angeles and the State of California.

Other investors who specialize in these types of properties are also finding it easier to close lease deals for their space.

Zaya Younan, chairman and chief executive of Woodland Hills-based Younan Properties, which specializes in acquisition, repositioning and management of commercial office properties, notes his firm has seen a 5 percent increase in rental rates in the second quarter, and a pullback of landlord concessions.

Younan describes a significant "flight toward quality" in the second quarter office sector, with companies upgrading from Class C to Class B product and from B to A product. "It's put upside pressure on Class A and B+ buildings," he said. "There's plenty of lower grade or industrial/flex properties, but little quality office space."

Vacancy rates have risen slightly on the industrial side, but remain at what most consider full occupancy.

On the industrial side, the vacancy rate rose to 4 percent from 3.3 percent. Notable industrial lease deals in the second quarter included Power Partners signing up for 80,900 square feet in the Conejo Spectrum, at 1465-1475 Lawrence Drive, Thousand Oaks. The group inked a 10-year deal at 46 cents triple net (which doesn't include insurance, taxes and maintenance).

Joe Kelly Productions leased 55,088 square feet at 11151 Vanowen St. in North Hollywood for 10 years starting at 53 cents triple net with CPI bumps every 24 months.

Major Events:

-Broadspire Insurance Services leased 30,000 square feet at 26541 Agoura Road in Calabasas.

-InQ leased 19,000 square feet at 30501 Agoura Road in Agoura Hills.

-Milan Properties bought an 87,000-square-foot building at 6400 Laurel Canyon in North Hollywood for $8.4 million.

-Joe Kelly Productions leased 55,088 square feet at 11151 Vanowen St. in North Hollywood for 10 years.

-Famlee Electronics, a wholesale distributor of integrated circuits and semiconductors based in Canoga Park, signed on for 28,566 square feet for five years at 42 cents triple net, in a building at 20150 Sunburst St. in Chatsworth.

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