The San Fernando Valley office market displayed a rare combination in the first quarter a significant exodus of tenants coupled with a slight increase in the average asking rental rate.
More specifically, the Valley’s tenant base shrunk by more than 250,000 square feet during the quarter, causing its vacancy rate to rise to 12.1 percent, up from 10.7 percent at the end of 2000, according to Grubb & Ellis Co. Meanwhile, the average monthly asking rent ticked up slightly to $2.30 per square foot, from $2.28 in the fourth quarter and $2.07 in the year-earlier quarter.
The submarket suffering the largest exodus was the East Valley which encompasses Universal City, Studio City and North Hollywood. The office vacancy rate there nearly doubled to 15.1 percent, up from 8.4 percent in the previous quarter.
Further exacerbating that softness is the significant amount of sublease space still on the market there, said Rob Quigley, an analyst with Cushman Realty Corp.
Despite the softening conditions, developers currently have 1.2 million square feet of new office space under construction in the San Fernando Valley, with about one-third of that being built in the Conejo Valley. As a result of the building activity, the submarket saw its office vacancy rate jump to 13.7 percent in the first quarter, up from 9.7 percent in the previous quarter.
“That increase (in Conejo Valley’s vacancy rate) was due to an influx of new space, rather than any weakness in demand,” said Quigley.
Indeed, Conejo Valley office tenants absorbed more than 91,000 square feet during the first quarter, though that was less than half the nearly 183,000 square feet absorbed there in the previous quarter.
Investment Development Services Inc.’s 327,000-square-foot Westlake North Business Center in Westlake Village, which began leasing space in the fourth quarter, saw its activity slow in the first quarter. Allied Interstate Inc. signed the largest deal in the first quarter, a six-year lease valued at almost $3 million for 16,800 square feet, he said.
“It will be an active market in the second quarter,” said Quigley. “There is available space in the San Fernando Valley and someone is going to fill it.”
The East Valley’s first quarter net absorption of office space a negative 155,193 square feet represents a dramatic downturn from the fourth quarter when tenants rented 65,312 more square feet than they left.
In the Central Valley, which includes Sherman Oaks and Encino, the office vacancy rate jumped to 9.1 percent in the first quarter from 7.5 percent at the end of 2000, as tenants vacated 116,031 more square feet than they moved into. That’s a dramatic reversal from the 104,000 square feet of positive absorption in the fourth quarter.
As for the supply of commercial space in the Valley, “it’s still pretty much status quo until the Sherman Oaks Galleria gets delivered,” said Carl Muhlstein, senior vice president at Cushman Realty. “There isn’t another large block of space opening along the (Ventura) 101 (Freeway) from Universal City to Woodland Hills.”
The Galleria, an 880,000-square-foot symbol of Valley life in the 1980s, is scheduled to reopen this summer after being closed for two years of renovations. Among other tenants, Pacific Theatres will open a 16-screen movie theater, there will be a Cheesecake Factory, the nation’s largest Tower Records and 600,000 square feet of high-end offices housing Warner Bros. and other companies.
Muhlstein said that Chatsworth remains one of the Valley’s most attractive areas for companies looking for quality space at affordable rates.
“In Chatsworth, those tenants are happy to pay $1.75 per square foot for rent because of the quality worker pool, the DWP (being the area’s power supplier) and access to the bedroom communities of the Conejo Valley,” he said. “Leasing space is easier because the tenant knows they will have a more reliable source of power.”
The West Valley showed only a slight increase in its office vacancy rate, to 10.3 percent, compared to 9.6 percent in the fourth quarter.
Meanwhile, asking rents continued to increase across the Valley. In the East Valley, the average monthly asking rent rose to $2.64 per square foot from $2.54 in the fourth quarter, while tenants in the West Valley saw an average asking rate of $2.52 per square foot, up slightly from $2.48 in the fourth quarter.
In the Valley’s industrial sector, the vacancy rate remained flat at 4.1 percent.
“There is a very limited amount of new (industrial) construction in the San Fernando Valley,” said Jim Linn, senior vice president at Grubb & Ellis. “There are companies still looking for space, but they can’t find a suitable site, forcing some to move to the Santa Clarita Valley.”
Bill Boyd of Grubb & Ellis blamed the migration to the Santa Clarita on a noticeable difference in rent. “It’s attractive to business owners because of its lower rents,” he said. “A company paying between $2.50 and $2.65 in the (San Fernando) Valley can move 10 miles (farther north) and pay between $1.80 to $2 per square foot.”
