San Fernando Valley office users were squeezed ever more tightly in the first quarter of 2006. A lack of quality rentals, coupled with rising construction costs, helped to sustain a market dominated by owners seeking record returns on both the sales and leasing sides.


"Most of my Valley properties are 100 percent leased, and terms are much more landlord-oriented," observed Thomas N. Specker, Principal, Lee & Associates Inc. "Investment product is scarce and sellers want reciprocal value as the rents trend upward."


Grubb & Ellis Co. reported rents in the area's biggest submarket, the West Valley, up 3 cents to $2.32 per square foot, 22 cents higher than the same period last year. In the Central Valley, rents spiked to $2.23, up 15 cents compared to the first quarter of 2005.


Rising rents and falling vacancies have created favorable market dynamics for institutional buyers in the San Fernando Valley, investment experts said. Land and replacement costs have sent sale prices soaring past $150 per square foot. But trading has lagged due to a lack of quality product.


"Most everything is weighted toward owner/users," said Barbara Emmons, executive vice-president, CB Richard Ellis Group Inc. "There's a lot of cash out there, but finding buildings of Class A, institutional grade is a challenge."


With interest rates still low, office sales in the first quarter continued to favor entrepreneurs with debt financing. Deals included Venice Investments GP selling a 73,291-square-foot Washington Mutual Building at 10850 Riverside Drive in North Hollywood. Moise Lavian paid $9.5 million, or roughly $130 per square-foot.


KS Balboa LLC sold a newly built 7,874-square-foot three-story office building at 5500 Balboa Blvd. in Encino. The reported price paid by the Academy of Country Music was $3 million.


Vacancy rates underscored the first quarter rental pinch. West Valley openings dropped from 9.6 percent to 9.2 percent, well off the 10.7 percent rate in the same period of last year. East Valley vacancies finished at 5 percent, down nearly three percentage points from the end of the first quarter last year.


Sustained Valley job creation fueled the space crunch. Brokers also said that a strong residential conversion market might ultimately stymie any new office development in the West Valley by gobbling up remaining space.


"Developers aren't going to build a new office site when they can put up residential multi-family and make more money," observed Tom Specker, a broker with Lee and Associates. "Given the costs of new construction, the numbers aren't even close."


Warner Center has become a focal point for residential developers. Fairfield Warner LLC, a partnership between California State Teachers Retirement System and Texas-based Fairfield Residential, bought a 10-acre site from Pacific Properties for $60 million. The project, at 6301 DeSoto Ave., will include demolition of 186,000 square feet of Class B office and industrial space to make way for more than 500 new apartments and condominiums.


Like sales, first quarter Valley leasing was modest. Deals included commercial insurance firm, Blue Skies Forever, inking 2,100 square feet at 20720 Ventura Blvd., Woodland Hills. Terms were $1.97 per square-foot for five years with landlord CPT/SC Title Holding Corp.


Blood products provider HemaCare Corp. consolidated its Woodland Hills office and Sherman Oaks lab by taking 20,000 square feet at Sherman Plaza, 15350 Sherman Way in Van Nuys. Embarcadero Capital Partners set terms at $1.95 Full Service Gross (FSG) for 10 years with 3 percent annual increases.


The biggest closing was a renewal that did not boost the quarter's low absorption numbers (just over 4,000 square feet in all of North Los Angeles). Sanyo North American Corp. renewed for 67,250 square feet in the Chatsworth Business Park, 21605 Plummer St. The 11-year transaction with Santa Ana-based Triple Net Properties was valued in excess of $15.8 million.


"A lot of deals were crammed in at the end of '05," said Matthew Heyn, senior associate with CB Richard Ellis in Universal City, "and that slowed down first-quarter absorption. There just aren't that many big blocks of space on the market to help push absorption."


Warner Center is the Valley's last outpost of major high-rise space. Douglas Emmett controls roughly half-a-million of the 680,000 square feet of rentable product in Warner Center. The L.A.-based firm retains a handful of floors in the Warner Center Towers, as well as the largest block of contiguous space in the submarket, 115,000 square feet, at the Trillium.

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