Valleys’ Office Vacancy Rate Still Falling

Despite the commercial real estate slump in many parts of the nation, the office vacancy rate in the San Fernando Valley and nearby regions continues to fall, and office space could be less available in the next two years because fewer new buildings are coming on line.

The combined average vacancy rate in the San Fernando, Conejo and Santa Clarita valleys fell in the fourth quarter to 13% from 13.6% the previous quarter, the real estate firm Grubb & Ellis Co. reported. It was the rate’s fourth consecutive quarterly decline, placing it at its lowest level since late 1988, when average vacancies stood at 12%. In 1986 in the San Fernando Valley, the vacancy rate was as high as 21%.

Local growth restrictions and, more recently, banks’ fears about lending for new offices are keeping a lid on construction. Those trends are also changing the way local office developers and tenants reach terms on new leases, industry analysts say.

The region’s latest rate compares favorably with those in overbuilt cities such as Denver, Houston and New York, where the worsening commercial real estate slump has sent vacancy rates between 15% and 25%.

In Los Angeles County overall, the amount of net additional office space leased during 1990--known as net absorption--tumbled 40% from 1989, to 4.3 million square feet from 7 million. But the county’s vacancy rate stayed at 15%, indicating that just enough new office space was built during the year to handle the new tenants.

Put another way, the total amount of office space being leased in Los Angeles County at the end of 1990 was about 121 million square feet, up the additional 4.3 million from a year earlier, said Dennis Macheski, director of research at the Los Angeles office of Price Waterhouse & Co., the accounting firm. Macheski until recently held the same post at Grubb & Ellis.

Those figures translate into a 4% growth rate last year. That’s still much slower than in previous years, but remains “the envy of most places in the nation,” Macheski said.

In the San Fernando Valley area, net absorption of office space inched up to 1.1 million square feet in the fourth quarter of 1990 from 1 million a year earlier. But there is a stark disparity of office availability between each end of the region.

In the West Valley, which includes the Warner Center high-rise district in Woodland Hills and where new construction has been strongest, the office vacancy rate was 19%. That was the highest rate in the region, but even the West Valley’s rate fell from 23% a year earlier.

Conversely, the rate in the East Valley, home of Burbank and Universal City, was a mere 6% largely because few high-rise offices are being built there.

The rate in the burgeoning Santa Clarita Valley was only 5%.

Office space in Burbank and in the Encino/Sherman Oaks area “is at bare minimum,” said Mark Sullivan, associate managing director in the San Fernando Valley office of Julien J. Studley Inc., a Los Angeles-based real estate concern.

Not enough new office buildings are going up to satisfy demand for space in those areas, Macheski said. At the end of 1990, the West Valley had the most new office construction under way--626,000 square feet. But the San Fernando Valley region overall had 1.2 million square feet under construction, 40% less than the 2 million being built at the end of 1989, Grubb & Ellis said.

Two reasons were cited: local regulations curbing commercial growth, and a growing unwillingness among banks and other lenders to finance new offices.

Even if developments are approved by local governments to meet growth restrictions, developers “still face the construction funding difficulty that everyone is facing,” Sullivan said.

The impact of that moratorium, or “blanket policy” against lending for new offices, as some industry experts call it, won’t fully be known for another 18 to 24 months--the amount of time it otherwise would take to erect a rash of new buildings, Macheski said. But it is clear that office space will be even less available, he predicted.

“We’ll definitely be feeling it,” he said. “The Valley is the tightest office market in L. A. County and tighter than most markets in the nation, and it’s going to become even tighter.”

In the meantime, developers are increasingly having to pre-lease big chunks of their proposed office buildings before the banks will provide financing for construction. Brad Wilson, an office specialist in Grubb & Ellis’ Sherman Oaks office, said that today “you need to have a tenant in order to build a building, and that tenant has to be financeable”--a fancy term meaning a tenant that can pay its rent.

Pre-leasing is a common practice in parts of the country, but uncommon in the San Fernando Valley, where tenants traditionally sign leases only after “they’ve gone in and felt the walls” of an office, Sullivan said.

“The Valley has never been a pre-lease office market,” Sullivan said. “But now banks are not going to lend a dime until they’re anywhere from 20% to 40% pre-leased.”

Case in point: a four-building office complex planned next to the Media City Center shopping mall being built in Burbank. Homart Development, the offices’ developer, must first secure a major tenant before its lenders will release the cash needed to construct the first building.

So far, Homart’s leasing agent, Cushman & Wakefield, has yet to secure its first major tenant.