Office Market Comeback Puts Vacancy Rate at 13%

The office vacancy rate in the San Fernando and Conejo valleys was 13% in the third quarter as the office market continued its strong comeback, according to a survey by Grubb & Ellis, a Los Angeles real estate firm.

Since the office vacancy rate swelled to 19% in the fourth quarter of 1986, the rental market has tightened and over the past four quarters the vacancy rate has steadied in the 12% to 13% range. “I think the market is going to continue to tighten,” said Seth Dudley, corporate vice president with Julien J. Studley, an Encino commercial real estate concern. “There’s not enough construction to keep pace with the demand.”

During the third quarter, the office vacancy rate in downtown Los Angeles was 13%; it was 10% in West Los Angeles.

Valley Vacancies

At the close of the third quarter, about 2.3 million square feet of office space was vacant in the Valley from an inventory of 17.9 million square feet, according to the survey.

The survey covers an area from Newbury Park to Burbank. In the latest quarter, the East Valley had the lowest vacancy rate at 9%, while the Conejo Valley area, which includes Calabasas, recorded the highest vacancy rate at 17.5%.

Dudley said that the biggest change in the market recently “is not in rental rates but in concessions.” When there was a glut of space available, he said, landlords typically gave a year of free rent to secure a 10-year lease. Now on a 10-year lease, he said, the free rent is usually 8 or 9 months. There has also been a return to cost-of-living adjustments in rental contracts, he said, with adjustments coming as often as every year instead of every 2 1/2 or 5 years.

It will remain a landlord’s market, Dudley said. “If you look at major office projects of 100,000 square feet and up between Burbank and Warner Center, there are only three under construction,” he said.

Slower Process

Howe Foster, Grubb and Ellis’ senior vice president, said that ordinarily in such a strong market one might expect a mushrooming in office projects, but “the developmental process is slower and more deliberate today. The ability to develop a community dramatically and overbuild markets does not exist anymore.”

Building moratoriums are the chief reason the market will remain tight, Dudley said. “The slow-growth movement is just in its infancy, and it has got a lot of staying power.”

The one market that has lagged the local recovery is the “Technology Corridor” in the Conejo Valley. Although that area offers lower rents, it is also much farther west from most corporate headquarters. But as the rest of the Valley office market tightens, Dudley said, more back office operations of banks and insurance companies already doing business in the San Fernando Valley are likely to move into the Conejo area.

Dudley notes that raw land in Agoura and Calabasas costs 20 to 23 cents per square foot, compared to 75 cents a square foot in Warner Center.

Nearly Full

One final indication that the Valley office market is continuing to heat up is that the huge Encino Terrace Center office building on Ventura Boulevard is filling up. The 6-story office building with the white facade fills a city block and is owned by Fujita, the Japanese construction company.

The building opened in January, 1986, at a cost of $35 million to $50 million but soon earned a reputation as a white elephant. Rivals said one problem is the building’s long floors--nearly the length of two football fields--makes it more suitable for major corporate clients instead of smaller businesses. As a result, Dudley, who is one of the leasing agents for the building, has run way behind schedule leasing space.

But Dudley says the building is now nearly 75% leased. “We’re getting there,” he said.

SAN FERNANDO VALLEY OFFICE SPACE

1988 1987 3rd Qtr. 3rd Qtr. Vacancy Vacancy Area Rate Rate Burbank,StudioCity, 9% 15% Universal City, North Hollywood Encino, Van Nuys, 15% 12% Sherman Oaks, Northridge Woodland Hills, 11% 14% Tarzana, Canoga Park ThousandOaks,Agoura 17.5% 19% Westlake Village, New- bury Park, Calabasas