Sellers Reluctant to Close Despite Market-Peak Conditions

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San Fernando Valley vacancies dropped, while net absorption and Class A rents rose in the second quarter. But brokers said the real story was that many sellers were reluctant to pull the trigger at the top of the office market.


“This quarter and the next will be known as the ‘Oh, why didn’t I sell when I could have and gotten the bigger price?'” said Craig Stevens, principal with Lee & Associates in Sherman Oaks.


“There’s very little available for under $300 per foot; given the costs of new construction, which drives up the value of existing properties, and very solid rents, the time is now, not later.”


Stevens said that despite a deep pool of institutional investors who are convinced commercial office returns will come back strong, the sales market was static.


“Sellers are worried they won’t get full valuation, and buyers are reluctant to overpay,” Stevens said. “Everyone, including the lenders, is basically sitting on their hands waiting to see what’s down the road.”


Those who did take the plunge were rewarded with solid returns. Mammoth Realty Fund-Northridge LLC sold a 34,275-square-foot medical building at 9535 Reseda Blvd. in Northridge to Northridge Medical LLC for about $282 per square foot, or roughly $9.6 million. Procare Management Corp. sold a building at 15456 Ventura Blvd. in Sherman Oaks to Sherman Ventura Investments LLC. The 29,726-square-foot property traded for $7.8 million.


On the rental side, the West Valley submarket set the pace. Grubb & Ellis Co. reported vacancies in the submarket at 7.7 percent, down sharply from the 12.4 percent rate registered in the same quarter of 2005. Net absorption was strong, rising more than 70,000 square feet from the previous quarter to 113,626 square feet.


West Valley deals were highlighted by Aon Service Corp. renewing 17,931 square feet with American Realty at 21900 Burbank Blvd. in Woodland Hills. Terms were set in the $2.20 per square foot range, full service gross, for a little more than five years.


World Financial Group leased 12,993 square feet of Class A space from the Valley’s biggest office landlord, Douglas Emmett. The range brokered in Warner Center Tower No. 5, at 21800 Oxnard St. in Woodland Hills, was between $2.25 and $2.35 per square foot, with 4 percent annual increases, for six years.


Carle Pierose, an associate with Charles Dunn Co. in Studio City, said annual rent increases of 3 percent, which were the norm, have been replaced by 4 percent. In many cases, landlords are tying rent increases to the consumer price index. “They’re pushing hard for a 3 percent floor and 6 percent ceiling to get that 5.4 percent increase that mirrors the CPI,” Pierose said.


East Valley firms felt the pinch. Class A rentals in areas such as North Hollywood and Studio City, rose 22 cents in the second quarter, from $2.59 to $2.81. That’s more than 25 cents higher than the same period last year. Even Class B “creative space” mainly reconfigured lofts and warehouses that have been very popular with East Valley entertainment firms saw a spike in rents, from $1.99 in the previous quarter to $2.07.


High construction dollars associated with tenant improvement costs were mostly to blame, putting a squeeze on landlords to make their buildings profitable. “I’m telling my tenants that if they can get a 4 percent lease for five years with a 4 percent option at the end, they’re in great shape,” Pierose noted.

The Central Valley area also saw a drop in vacancies. Rates moved down from last quarter’s mark of 5.3 percent to 4.8 percent, while rents jumped 10 cents, to $2.33.


Year-to-date net absorption in the Central Valley, which was solid at 40,908 square feet, was still off last year’s scorching overall mark of 244,719, in the same period. Much of the submarket’s tightening came from Sherman Oaks, where landlord Douglas Emmett owns high-rise towers on three of the four corners at Ventura and Sepulveda Boulevards.


Inside Emmett’s Sherman Oaks Galleria, 15301 Ventura Boulevard, Devry inked 35,000 square feet. The 10-year term had a start rate of $2.45, full service gross, with 3 percent annual increases.

Broker Michael J. Dunn, of Dunn Property Group, said demand in the West Valley and Santa Clarita has made Central Valley locations such as Northridge a popular new option. “Tenants have definitely been attracted by the larger floor plates and abundance of parking,” Dunn noted.


A two-story office building on the site of the former Washington Mutual office campus at 9451 Corbin Avenue backed up Dunn’s claim. Corbin Northridge L.P. leased 24,045 square feet to Holman Professional Counseling Centers, in a seven-year deal valued just below $1.85, full service gross. Harris Corp. leased 30,444 square feet in the same building, in a five-year triple net transaction valued at about $3.3 million.

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