Plunging vacancy rates usually mean a hot market with lots of activity, but there's been little movement in the San Fernando Valley.
Available commercial space in the fourth quarter dropped to 7 percent from 7.8 percent in the third quarter for the San Fernando Valley. In the West Valley area, the rate plunged to 9.6 percent from 11.4 percent in the third quarter, according to Grubb & Ellis Co.
But now, with rents having climbed steadily the past year, and building sales down, brokers said dark clouds could be overhead.
"It's the Bermuda Triangle of commercial real estate," said Ron Wade, senior vice president with CB Richard Ellis Group Inc. in Sherman Oaks. "No one's buying, no one's selling, and for firms who need to add bodies, there's nowhere to go."
Brokers described a "temporary disconnect" in the commercial market. The indicators would typically point to heightened activity. But tenants in a growth mode were hampered by a lack of space and climbing rents. Buyers sat tight because sellers, who've seen rents increase by 20 percent to 30 percent, want more money for their space.
Some believe that could lead to an exodus of tenants and buyers.
"Indicators signal a push up the 101 Freeway into Agoura, Westlake, and Newbury Park," said Marc Spellman, principal, Lee & Associates. "That's where there's a real opportunity to amass large chunks of space."
Bucking the low-activity trend were two prominent local investors. Jamison Valley Holdings bought a 177,029-square -foot site at 15315 Magnolia Blvd. in Sherman Oaks. Westoaks Associates LP sold the multi-building parcel for $30.9 million, or $175 per square foot. Investor David Lee, through Aviation Plaza LLC, bought a 55,600-square-foot site at 16461 Sherman Way in Van Nuys from Aviation Plaza Partners LP for $4.5 million, or about $81 a foot.
Whole valley tight
Vacancies in Central Valley hotspots such as Encino and Sherman Oaks were tight. Vacancy rates fell to 5.3 percent in the fourth quarter from 7.8 percent in the same quarter last year.
Small legal and tech firms pushed East Valley vacancies to a historical low of 4.9 percent, down sharply from the 9.1 percent closing at year's end in 2004.
Of course, as the vacancy rate dropped, more space was taken off the market, with net absorption doubling to 202,704 square feet in the quarter in the San Fernando and Conejo valleys, up from 100,835 square feet in the third quarter. The West Valley set the pace, boosting absorption to 148,855 square feet from 74,887 square feet.
Deals at LNR Warner Center, 5700 Canoga Ave., included insurance brokers Poms & Associates inking 37,284 square feet for 10 years with a start rate of $2.50 per square foot. Care Level Management signed for 36, 922 square feet for 10 years at a rate of $2.55 per square foot.
Workers compensation expert Zenith Insurance Co. signed on for 10,944 square feet at 5957 Variel Ave., Woodland Hills. Terms on the deal, which landlord Allison Warner Center LLC declined to disclose, was in excess of $1.5 million, overall consideration.
Even though internal expansion of entrenched West Valley players helped increase absorption, demand far exceeded supply. Firms getting into the market, or those looking for larger floor plates, don't have a lot of options.
Asking rents across the Valley for Class A office space, while down just two cents from the previous quarter at $2.30 per square foot, were up 7 cents from the same period one year ago. Class B space clocked in at $2.15, nearly 20 cents higher than the end of 2004. Class B rents in North Hollywood, where floor plates less than 7,000 square feet dominate, topped out at $2.09 per square foot, 16 cents above the same year-end period in 2004.
Rents in prime Class A product equaled historic highs. Brokers reported rates of $2.75, full service gross with the landlord picking up utilities and other ownership expenses on the upper floors of Warner Center. That parallels top-end rents in 1990, when development first took off.
"The big difference now," said Spellman, "is that there's very little coming out of the ground."
New Warner Center office product is in the pipeline, but it's more than a year away. Phase IV, LNR Warner Center, hasn't even broken ground yet. A 30-acre parcel, controlled by The Westfield Group, on Topanga Canyon Boulevard, could provide several hundred thousand square feet of space but it is still waiting planning approvals.
Of the roughly 19 million square feet of rentable space in the San Fernando Valley, only 7 percent was vacant by year's end. Without any valves to relieve key pressure points, experts said firms looking to grow had to stay creative.
"The Fortune 1000 stabilized companies are all doing long-term deals with multiple cancellation provisions," Wade observed. "People want security and commitment, but the flexibility to make changes if the market turns."
For reprint and licensing requests for this article, CLICK HERE.