Commercial landlords in the San Fernando Valley flexed their muscles in the third quarter, boosting rents in high-volume markets such as the West Valley.
Tight vacancies and a lack of quality product were the driving forces.
Class-A asking rents in the West Valley submarket, which includes more than 6 million square feet in Warner Center, rose to $2.31 from $2.10 in the prior quarter, according to Grubb & Ellis Co. Lease rates for similar quality commercial space in the Central Valley were up 24 cents from the like period a year earlier.
All this was a reflection of vacancy rates that range from 5.3 percent in the Central Valley to 11.4 percent in the West Valley and that generally headed downward in the quarter.
"These are the lowest office vacancy rates I've seen in the 21 years I've been working in the San Fernando Valley," said Nancy Stark, first vice president with CB Richard Ellis Group Inc. in Sherman Oaks. "We're at a point where landlords feel they can justify rent increases that are more significant."
Brokers said tenants in the ultra-tight Central Valley submarket were being forced to compete for the same space. With rents on the rise, and concessions including free rent and high TI allowances pulled off the table, companies scrambled to lock in terms.
"I'm telling tenants to sign the longest deal you can before rents go any higher," observed Stacy Vierheilig-Fraser, senior managing director with Charles Dunn Co. in Studio City.
"Given the costs of new construction and rising interest rates, there's no way landlords won't continue to raise prices."
Entertainment firms paced rentals in the East Valley. The submarket, which includes North Hollywood, Universal City and Studio City, hit a yearly low in vacancies at 5.5 percent, down from 7.3 percent in the prior quarter.
Tollin Robbins Productions signed on for 8,000 square feet at 4130 Cahuenga Blvd. Terms with Cahuenga Plaza LP were 36 months at $2 per square foot. Trailer producer Launchpad also inked 8,000 square feet at 4146 Lankershim Blvd. Landlord D-Mark Holdings Inc. set terms at five years for just under $2 per square foot. Both deals were full service gross with the landlord picking up insurance, taxes and maintenance.
Net absorption reflected the commercial property pinch in the third quarter. East Valley absorption shot up five-fold to more than 75,000 square feet from 13,281 square feet in the previous quarter. The West Valley was also in positive numbers at 74,887 square feet after the market gave back 138,135 square feet in the prior quarter.
Rental action in the West Valley came from mid-size firms entering the market and institutional tenants needing more space. The Los Angeles Unified School District renewed 29,116 square feet at 8550 Balboa Blvd. in Northridge. Terms from Northridge Business Center LLC were for 64 months at $1.85 per square foot.
Top Finance Co. moved into 14,033 square feet at 9121 Oakdale Ave. in Chatsworth. Supply chain logistics giant, ProLogis, which recently acquired the building's landlord, Catellus Development Corp. for $5.5 billion, set terms at $1.64 per square foot for five years.
But as hot as leasing action was, office sales were sluggish, with only a handful of small properties trading hands in the Central and West Valley. "For a long time it made more sense to buy, rather than lease," said Vierheilig-Fraser. "But with prices so high for even Class B and C office space, that's turned around."
Bright spots on the sales front were limited to Agoura Hills Business Park, at 30401-30501 Agoura Road. LAFP Agoura Westlake Inc. sold the two buildings, which comprise 115,227 square feet of Class A office space off the Ventura (101) Freeway, to Arden Realty Finance Partnership. The sale price was $23.2 million, or about $200 per square foot.
Condo conversions in the West Valley remained red hot. John Walsh of Marcus & Millichap in Encino represented two private investment groups in the $8 million sale and purchase of a 42-unit apartment building at 7632 Topanga Canyon Blvd in Canoga Park. The 35,323-square-foot Chester House will be converted to low-income condos to fill demand for a surging office job market in Warner Center.
"Warner Center is turning into the Century City of the Valley," said Ben Berry, a real estate analyst with Marcus & Millichap. "There's a booming service sector that wants to live and work there, and it's having a spillover effect for markets like Canoga Park and West Hills."
West Valley brokers estimate that less than 50 percent of the buildings needing no further entitlements for conversion from the city of Los Angeles have been sold. "With the addition of the Orange Line (a high-speed bus service from Warner Center to the Metro Red Line in North Hollywood) the submarket is bound to get more dense and vertical," said Berry.
Conversion fever was not confined to the Warner Center area. Paxton Street LLC sold a 14-acre industrial parcel at 13500 Paxton St. in Pacoima to a local developer, Primestor Pacoima LLC, for $14 million. The former Price Pfister plant will likely be converted into a residential/retail center anchored by a big box store.
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