When Buildings Show Their Age, It’s Time for a Rehab
The passage of time takes a toll on everybody and everything, including commercial office buildings.
Regular maintenance does help stave off the aging process, but sometimes what’s needed is a make-over--especially with all the newer buildings for rent.
If you thought people only worried about people getting older, talk to building owners and managers along Ventura Boulevard in Sherman Oaks and Encino.
“There are more office buildings going through a rehab than not going through a rehab,” observed Michael P. Hughes, director of business development for Koll Construction.
Many of the San Fernando Valley’s office buildings were built in the late 1960s and early 1970s, he said, and the time has come to spruce things up. Besides, Hughes added, building owners are being required to make their buildings more accessible to the disabled and to update their fire safety systems.
“If you’re going to spend so much money, how are you best going to pay for it?” The answer, Hughes said, is to attract new tenants and hold on to existing ones with more luxurious and contemporary-looking lobbies, plus new elevators, bathrooms, floor coverings and landscaping. “Class A buildings sliding into the Class B range are all looking to renovate.”
“Most definitely we have been in a period of renovation of older projects,” said Lyle Randles, president of the Building Owners and Managers Assn. of Los Angeles and president of Encino-based property management and leasing firm Wilkins Randles Associates. Randles recently oversaw about $1.5 million in improvements at the Manufacturers Bank Building on Ventura Boulevard in Encino. This 12-story, 150,000-square-foot building was built in 1970 and needed to be brought into compliance with state and local codes. The owner, Randles said, “seized it as an opportunity to renovate the building.”
Pension fund manager TCW Realty Advisors Inc. owns six office buildings in the Valley, including two in Encino on Ventura Boulevard, both of which are sporting new lobbies and will soon feature new floor and wall coverings in the corridors. It’s a matter of keeping up with the competition, said Jan Sweetnam, director of marketing for TCW in the San Fernando Valley. “To some degree, it becomes a beauty contest.
“Some of the larger tenants have gone to Warner Center,” Sweetnam conceded. The newer buildings in Warner Center in Woodland Hills offer competitive rental rates and larger floor plans than most buildings on Ventura Boulevard. Many tenants, he said, ask “why be on three floors in Encino when you can be on one floor in Warner Center?”
The answer has been self-evident in the ongoing exodus of larger Ventura Boulevard tenants to Warner Center. Updating the look of Ventura Boulevard buildings is one way owners and managers can fight back.
Despite the relocation of tenants to Warner Center, that area has one of the Valley’s highest office vacancy rates, thanks to the addition of new space. At the beginning of April, Warner Center had a vacancy rate of about 26%, and that doesn’t include empty space being offered for sublease. According to figures compiled by Beitler Commercial Real Estate Services, only Canoga Park and Granada Hills posted higher vacancy rates--30% and 32%, respectively. The overall West Valley office vacancy rate was 21%. In the East Valley, the vacancy rate was significantly lower at about 12%.
“Landlords should do anything they can to retain a tenant. There’s so much at stake,” said Richard C. Mallory, partner at Los Angeles law firm Allen, Matkins, Leck, Gamble & Mallory. “It’s too expensive not to keep them.” Mallory cited a recent study that found the cost of finding a new tenant so high that landlords would be better off retaining a tenant at what might seem a modest rent, rather than seeking out new tenant who would pay a higher rent.
That’s because finding new tenants costs money; so does owning empty space if a new tenant can’t be found immediately, not to mention the free rent and tenant improvements that have to be offered to entice new tenants to a building. Keeping all these costs in mind, the few dollars that landlords spend on sprucing up a building and keeping tenants happy is money well spent, Mallory said.
Many buildings in need of repair and renovation are being acquired from distressed sellers or lenders that have foreclosed on loans.
“Even with renovation costs, the total investment comes to about two-thirds of replacement cost,” said Bruce A. Frasco, senior vice president at Beitler Commercial in Sherman Oaks. “It’s a function of economics. These properties are being bought extremely cheap so the buyers can afford to renovate and still not charge big rents.”
One example, Frasco said, is a collection of five low-rise buildings in Woodland Hills known as Woodcourt II. The 65,000-square-foot project was built in 1979. In 1991 it was sold to a private investor by Northwestern National Life Insurance of Minneapolis, which had lent money to the developer, who defaulted.
The new owner bought Woodcourt for $6 million and is spending another $1.2 million to $1.4 million for new roofing, landscaping and other amenities. The challenge now for Frasco and the new owner is making all that money pay off with new tenants.
