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SAN FERNANDO VALLEY – Surging Demand for Office Space Pushes Rents Higher

Call it the big squeeze.

With the development of new office space lagging well behind economic expansion, tenants were hard-pressed to find suitable digs in the San Fernando Valley during the first quarter of 2000.

When they did, they were likely to encounter rent hikes.

All Valley submarkets posted vacancy rates below 10 percent by the end of the first quarter, according to Grubb & Ellis Co. And the tightest submarket is the Conejo Valley, where the office vacancy rate fell to 6.0 percent, down from 9.6 percent three months earlier.

“When you have a vacancy rate that low, there is nothing to absorb,” said Regina Burke, client services manager for Grubb & Ellis.

The decline in the Conejo Valley’s vacancy rate was caused by a number of major deals. Xircom Inc. leased a 200,000-square-foot build-to-suit at Conejo Spectrum in Thousand Oaks. Homestore.com leased a 137,000-square-foot facility in Westlake North Business Park, and Conexant leased 60,000 square feet of space in Newbury Park. Three tenants The Ryland Group, VPA Inc. and Poms & Associates together accounted for about 160,000 square feet of activity in the newly built Calabasas Park Centre.

Most of the leasing activity that occurred in the other submarkets was restricted to smaller deals, many under 10,000 square feet, and their vacancy rates actually rose a bit. But some of those upticks were due to new buildings coming on line, rather than tenants moving out. The West Valley submarket’s vacancy rate, for example, climbed to 9.8 percent from the prior quarter’s 6.6 percent because the new 21st Century Insurance Co. headquarters building added about 100,000 square feet of new space to the market. (21st Century is only occupying about 70 percent of the building.)

“Every time you add a new building, the (vacancy) rate is going to go up,” Burke said.

In addition to the new space hitting the market, West Valley office tenants vacated 7,159 more square feet of space than they moved into during the first quarter, but industry sources said that minimal outflow won’t persist.

“Next quarter, I would expect the West Valley to have a really healthy absorption rate,” Burke said.

Bill Inglis, first vice president with CB Richard Ellis Inc., added: “In Woodland Hills, I have four offers on the same space in one building. A lot of people are chasing the same space.”

Inglis said that while four offers on the same space is somewhat unusual, he and other brokers are regularly receiving two offers on many sites.

Vacancy rates remained relatively flat elsewhere in the Valley. The East Valley saw levels of 9.2 percent in the first quarter of 2000, compared to 8.6 percent in the final quarter of 1999. The Central Valley saw vacancy rates of 9.6 percent in the most recent quarter compared to 9.1 percent in the prior quarter, according to Grubb & Ellis.

Less than a year ago, brokers were predicting that lease rates, which climbed 15 percent and more in some markets during 1999, would stabilize, but the dearth of space is pushing up rates further still.

The largest percentage increase occurred in the Central Valley, where the average monthly class-A asking rate jumped by 12.5 percent to $2.07 a square foot. Conejo Valley asking rents are even higher, on average, jumping 8.4 percent to $2.20. In the West Valley, which experienced the largest rent increases last year, the average asking rent surged ahead by 8.2 percent to $2.38 a square foot.

Brokers said there would likely be further increases in rental rates due not only to the tightness of the market, but also because of new buildings expected to open in the coming year.

“It is rare to have double-digit (rent) increases back to back, but it can happen,” said Burke. “Also, when you build new buildings, that’s going to revise the average asking rent (upward).”

Other landlords tend to adjust their asking rents to keep them somewhat in line with the rents being sought at new buildings. New facilities such as the 21st Century Insurance high-rise in Warner Center are charging $2.50 per square foot, plus an additional fee for parking.

Another reason brokers say they don’t see rents hitting a ceiling anytime soon is that Valley buildings are enjoying some spillover benefits from the red-hot Westside market.

“I think the nice (Valley) buildings will get whatever rates they want,” said Rick Pearson, vice president at CRESA Partners. “They could push the rates to three bucks a foot and still be a buck under the Westside.”

Besides strong demand from office tenants, another force characterizing the first quarter was strong demand from buyers. Pacifica Real Estate Group acquired a 130,511-square-foot office building in Westlake Village for $14.5 million. An 80,482-square-foot office building in Tarzana was acquired by a group of private investors during the period.

The industrial market, tight for over a year now, retained its single-digit vacancy rate, at 8.1 percent. That’s up from 6.2 percent at year-end 1999, according to Grubb & Ellis.

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