By SHELLY GARCIA
The breakneck pace of real estate deals that characterized most of 1998 in the San Fernando Valley cooled in the final quarter of the year, stymied by events on Wall Street and in the capital markets.
In most areas, office vacancies continued to decline, but slowly. For the entire submarket, office vacancies fell to 13.9 percent, from 14.0 percent in the third quarter, according to Cushman & Wakefield Inc.
“The genesis of the slowdown was generated by Wall Street in September,” said Ron Wade, Cushman & Wakefield’s associate director. “When Wall Street took a hit, it kind of put the brakes on everybody.”
The temporary tailspin kept public companies from making decisions that involved large capital outlays, such as signing new leases. It also tied up financing sources for land and building acquisitions.
Largely because of the meltdown in high-risk securities investments, WMC Mortgage Corp., a sub-prime lender, pulled out of a deal to lease 160,000 square feet of space in West Hills Corporate Village, a complex under development by Regent Properties and Shamrock Holdings of California Inc. Another deal for a West Hills Corporate Village build-to-suit, by State Compensation Insurance Fund, also fell through, for internal reasons unrelated to the markets.
West Hills Corporate Village did secure one large lease: Boeing Co. signed a 10-year deal for 170,000 square feet that will be used for the company’s Rocketdyne Propulsion and Power subsidiary.
Other major office deals in the fourth quarter included the lease of 31,732 square feet in the Calabasas Technical Center by GTE and a 25,400-square-foot sublet at Develcore Center in Encino by MetroCity Mortgage. The space was formerly occupied by DreamWorks SKG. The Northridge Medical Center, a two-story building with 29,640 square feet of office space, was also sold to the Construction Laborers Union Pension Trust.
“As the capital markets recovery (continues), we’ll see more product changing hands,” Wade said. “I think we’re starting to see it now.”
Indeed, two large acquisitions are expected to close shortly. Douglas Emmett & Co. is in escrow to purchase the 375,000-square-foot high-rise at 15260 Ventura Blvd. in Sherman Oaks, and is holding discussions to acquire the Encino Terrace Center, a 394,000-square-foot office tower in Encino.
Trammel Crow Co. is in escrow to buy the site of the former Coast Federal Savings headquarters, a 388,000-square-foot complex in West Hills.
On the development front, Investment Development Services announced plans to develop a three-building, 326,000-square-foot office park on Lindero Canyon Road in Westlake Village.
The biggest reason for an anticipated increase in acquisitions and development projects is the record-low vacancy rate for class-A properties. Fourth quarter vacancy rates stood at 6.7 percent in the east Valley and 8.9 percent in the west Valley, according to Cushman & Wakefield. (Comparable figures for the prior period are not available.)
With rates in these two highly desirable areas falling below the critical 10 percent mark, lease rates will likely keep rising, giving developers and buyers a green light on their projects.
The shortage of class-A office space is also likely to affect class-B properties. During the recession, a number of companies that didn’t require class-A space leased those spaces anyway because of the low prices being offered. As class-A rentals rise and the leases held by these companies come up for renewal, some are likely to turn back to class-B space.
Lease rates for the fourth quarter rose to an average of $2.06 for class-A properties. For all classes, the average lease rate rose to $1.78. “We’ve historically come back to 1987 and 1988 asking rents,” Wade said.
Similar patterns emerged on the industrial real estate front, even though vacancy rates rose to 4.5 percent for the fourth quarter from 3.8 percent in the third, according to Grubb & Ellis Co.
The numbers are deceiving because over 3 million square feet of space was absorbed in the fourth quarter compared with just under 2 million square feet in the previous three months. Jim Linn, senior vice president for Grubb & Ellis, attributes the discrepancy between leasing activity and vacancy rates to several factors, including new construction that came on line during the fourth quarter.
Another factor may be sales activity that has increased now that lease prices have risen. Linn explained that having a lot of properties on the block could artificially inflate an area’s vacancy rate, because buildings for sale are considered vacant even though they may have tenants.
The biggest deterrent to growth in the industrial real estate market remains the lack of available space for additional development. The Valley’s inventory of industrial buildings is old, so available inventory usually lacks the kinds of amenities larger loading facilities, ample parking and upgraded electrical infrastructures found in places like the Santa Clarita Valley.
Still, with so little space available, brokers expect vacancy rates to continue to decline, giving rise to a corresponding increase in lease rates for industrial space in the Valley.
? Rocketdyne Propulsion and Power signed a 10-year deal for 170,000 square feet at West Hills Corporate Village.
? GTE leased 31,732 square feet in the Calabasas Technical Center.
? MetroCity Mortgage signed 25,400-square-foot sublease deal at Develcore Center in Encino, in space was formerly occupied by DreamWorks SKG.
? Construction Laborers Union Pension Trust bought the 29,640-square-foot Northridge Medical Center.
? Douglas Emmett & Co. is in escrow to purchase the 375,000-square-foot high-rise at 15260 Ventura Blvd. in Sherman Oaks.
? Trammel Crow Co. is in escrow to buy the site of the former Coast Federal Savings headquarters, a 388,000-square-foot complex in West Hills.
? Investment Development Services plans to develop a three-building, 326,000-square-foot office park on Lindero Canyon Road in Westlake Village.