Some Hear Echo of ‘Glut’ in Empty Office Space : While Term Is Debated, Oversupply Means Bargains for Tenants in Valley
When Texaco acquired Getty Oil last year, it also acquired a 20-year lease Getty had signed for 580,000 square feet of space in a spanking new, 36-story office tower in Universal City.
Texaco didn’t need the space, and in fact pays less rent where it is now, on Wilshire Boulevard. But the oil giant decided to move in anyway, rather than try to rent all those square feet to someone else.
“It was in our best interest,” said Joseph Papo, Texaco’s regional manager for corporate real estate in Los Angeles. “The market was soft.”
It still is. Developers and brokers don’t like to talk about it, but the San Fernando Valley has a large and growing oversupply of office space. Most agree that the market is soft, but there is a largely semantic debate over whether to call it a glut, a word that implies a more serious problem.
‘A Glut Is Under 85%'
A survey earlier this year of 12.4 million square feet of Valley office buildings by the Studio City brokerage of Zugsmith & Associates found that 87% of the space was occupied. Coldwell-Banker, in a similar recent survey, reported an 85.5% occupancy rate.
“If it gets below 90% you start getting concerned,” said Howard Sadowsky, Los Angeles senior vice president for Julien J. Studley Inc., a commercial leasing agent. “A glut is under 85%,” he said.
By comparison, Grubb & Ellis, another commercial brokerage firm, reported an occupancy rate of about 92% for downtown Los Angeles in February.
Both surveys count only existing office space. Much of the space under construction is already on the market for leasing, but that space is not counted in the surveys. For that reason, the percentages of available space leased downtown and in the Valley are probably even lower, according to some experts.
Concessions for Tenants
Glut or no glut, the office space has landlords routinely offering substantial concessions to get tenants.
“There isn’t a deal made anywhere in the Valley where you can’t get a good amount of free rent, significant tenant improvements and even a discount from prevailing rates,” said John Battle, an assistant vice president in the Woodland Hills office of Cushman & Wakefield, a commercial leasing agent.
Industry specialists say landlords grant the concessions to compete in a marketplace awash with new or soon-to-be-built office space. Brokers and developers stop short of calling the oversupply a glut, noting that space continues to rent--thanks partly to concessions.
“The Valley is stronger than most markets,” Sadowsky said. “There’s no question it’s soft. But there’s activity there.”
Space Hard to Absorb
But most experts agree that areas of the Valley have far more space than they can readily absorb, and that construction now under way is likely to make things even worse.
According to Studley’s figures, March and April this year saw more space on the Valley market than the same period o f 1984, but less space leased. Sizeable leasings in January and February, however, meant more space was leased during the first quarter of 1985 than in 1984.
Experts blame several factors for the oversupply: a lag between demand and supply, for example, and the fact that fewer companies than expected have moved to the Valley from downtown and the Westside.
One city staff planner, who asked not to be identified, said development occurs in phases, and that for the past couple of years, office buildings have been in vogue. The same was true of condominiums for awhile, he said, until they also were in a glut.
‘An Overbuilt Situation’
“We’re in an overbuilt situation,” said Lyle C. Randles, president of Wilkins Randles Associates, which manages office buildings in the Valley. “We’re probably going to see more and more concessions being made.”
From a tenant’s perspective, of course, things are just fine.
“The market out there right now is fantastic,” said James Travers, whose Travers Realty only represents tenants, and who is positive that there is a glut. “The next 18 months are absolutely the time to capitalize on this.”
For a tenant willing to lease 25,000 or more square feet for 10 years, Travers said, he typically can get the landlord to give a year’s free rent, to pay up to $25 per square foot for improvements, and maybe even to knock something off the asking rent.
Free Rent Virtually Standard
“This is the time to get yourself virtually turnkey installation--walls, carpeting, the whole ball of wax,” Travers said.
According to Randles, four to six months free rent is virtually standard. Rent reductions of between 10% and 20%, depending on the amount of free rent conceded, are also common, Battle said, although many landlords like to preserve their asking rents and entice tenants with rent-free months and interior improvements.
The soft leasing market is not something a lot of brokers and developers like to discuss. They are particularly reticent about specific deals they have made with tenants, for fear of making it easier for future tenants to bargain.
“It affects their ability to negotiate a lease,” said Charles Cusumano, a developer and president of Gem Realty in Burbank. “A lot of brokers and owners will be less than frank.”
Nevertheless, Cusumano said, everybody knows “the market is saturated with office space.”
The 20-story Warner Center Plaza in Woodland Hills, for example, is nearly three years old and still has 3 1/2 empty floors’ worth of unleased space.
“It’s been slower than we had hoped,” said Bob Voit, whose Voit Cos. built the structure in partnership with New England Mutual Life Insurance.
More Saturation Foreseen
Voit said things are picking up now. But Travers, the tenants’ broker, said a strong tenant in the Warner Center area can still get up to 15% off the asking rent--on average between $1.90 and $2.09 per square foot per month, according to Studley--for 20,000 or more square feet of space. On a 10-year lease, that would come to 18 months’ rent.
The office market will likely get even more saturated in the near future, experts say.
Zugsmith reports that more than 4.8 million square feet of office space was under construction in the Valley as of March 1. That would increase the existing pool of 19.3 million square feet by 25%.
Voit, for example, sees the construction as evidence of optimism. He is just finishing a 12-story building at Warner Center Plaza. A six-story, 420,000-square-foot building on Ventura Boulevard in Encino, built by Fujita Corp. USA, is now available for leasing. In Universal City, the $100-million Texaco building, built by MCA and now jointly owned with the oil company, has 400,000 square feet on the market.
Toluca Lake Activity
Texaco is trying to sublet 230,000 square feet of the section it leases, and there are another 170,000 square feet remaining in the building.
There also is a spate of construction in the Toluca Lake section of Burbank, including a 32-story tower with 520,000 square feet at the corner of Alameda Avenue and Maple Street, and a 20-story, 400,000-square-foot tower at Alameda and Kenwood Street.
The various surveys of office space in the Valley do not always coincide. They measure different things--office buildings of different sizes, for instance--or they may define the Valley differently.
Although Studley’s survey reported that just 12% more space was leased overall during the first quarter of 1985 than in 1984, another survey found even greater activity.
Grubb & Ellis Co., a commercial leasing firm, reported that 939,000 square feet of new office space was leased in the Valley during the first quarter of this year, nearly three times the amount leased in the first quarter of 1984.
But far more new space, 4.4 million square feet, was on the market in the first three months of this year than during the first quarter last year, when the figure was 1.9 million square feet.
25% Absorption Rate
As a result, the rate at which new space was absorbed--new space on the market divided by new space leased--was 17.5%, down slightly from 17.9% for the previous period. In the West Valley, the absorption rate was only 8.6%. It was 12% in the central Valley and 27% in the East Valley.
“Historically, 25% is the standard absorption rate” in the Los Angeles area, said Brad Koppel, a marketing specialist with Grubb & Ellis in Los Angeles.
Some brokers caution, though, that the newness of the Valley market makes such comparisons questionable.
“The suburban marketplace is a new wrinkle,” said Donna Altounian of Ramsey-Shilling Co., a commercial leasing company in Universal City.
Evidence of Oversupply
Figures aside, those in the industry provide ample personal evidence of an oversupply. Bill Inglis, an associate vice president in the Sherman Oaks office of Coldwell-Banker, said it now takes between 18 months and two years to rent all the space in a high-rise office building in most Valley locations.
Inglis handles leasing of the 21-story American Savings & Loan building on the southeast corner of Ventura and Sepulveda boulevards, a prime location, and considers himself spectacularly successful to have rented 86% of it within six months of completion. He expects full rental sometime around October or November, just about a year after the building was finished.
Beyond the immediate future, there are signs that office construction in the Valley is slowing. According to the California Building Industry Association, office permit valuations in the San Fernando, Santa Clarita, and Antelope valleys were $219 million during the first four months of this year, down from $310 million for the same period of 1984.
The valuations don’t reflect market value--they are based on a formula used to levy permit fees--but that formula is applied consistently, and the 29% decrease is significant, said Ray Sealy, executive vice president of the building association’s Los Angeles chapter.