Despite Earthquake, Office Vacancy Rate Hasn’t Tumbled

After the January earthquake, commercial real estate brokers were predicting that office vacancies in the San Fernando Valley would be cut in half by this summer to about 7% and that lease rates would rise as tenants displaced by the temblor found new space.

The predictions have yet to come true. In fact, commercial real estate brokerage firms are reporting an office vacancy rate of between 13% and 16% in the Valley. Making matters worse is what’s known as a negative net absorption rate in almost every part of the San Fernando, Santa Clarita and Conejo valleys. Negative net absorption means that more tenants were moving out of these areas than were moving in.

During May and June a total of 508,000 square feet of office space was leased in the San Fernando Valley, according to commercial real estate broker Julien J. Studley Inc. in Encino. That’s a decline of 16% from the 606,000 square feet leased during the same period last year--which back then was considered a weak market.

The vacancy rate--which is based on a percentage of existing office space that is vacant--has experienced a drop in some markets since the quake. However, much of this drop can often be due to the fact that certain buildings were taken out of commission by the January quake, not because more space is being leased.

If you’re looking for even bleaker news, consider this: Many leases that were signed in the first six months of this year were short-term deals signed as stopgap measures for tenants displaced by the quake. Within a year, many smaller tenants who previously occupied their own buildings will move back into their old offices and the vacancy rate for multi-tenant office buildings will rise again.

“The earthquake did have a beneficial effect on office vacancy rates, but we won’t see any big improvements absent another disaster,” said Michael Zugsmith, chairman of commercial real estate brokerage Zugsmith-Thind Inc. in Encino. “We lost 1 million square feet of office space in a few seconds, but there hasn’t been any great improvement in office vacancy rates.”

The San Fernando Valley’s healthiest market is Encino, Zugsmith said. Overall, the East Valley has an office vacancy rate of about 7%, which is enviable compared to other Southern California office markets. How long this submarket’s vacancy rate will stay that low is uncertain, though, Zugsmith said, because many of the new tenants in the area are there temporarily.

One thing that will not be driving up vacancy rates is new construction. Grubb & Ellis Research Services Group reports no new multi-tenant office construction completed during the first six months of this year in the San Fernando and Santa Clarita valleys as well as the Simi Valley area. The only reported multi-tenant project under construction is a 40,000-square-foot office building in the Santa Clarita Valley.

At least half of the leasing activity in the San Fernando Valley this year has been earthquake-related and not necessarily permanent, said Jeffrey M. Woolf, managing principal at Lee & Associates in Sherman Oaks. Various federal agencies leased more than 200,000 square feet of space after the quake to serve victims. And various insurance companies also leased extra space to handle the avalanche of claims. By the end of the year, these tenants will be gone, Woolf said. Most of the recent lease deals are for no longer than 18 months. Some of the tenants will disappear altogether and many will move back to their old offices when they are fixed up, Woolf said.

One bright spot, Woolf said, is in the market for office buildings up for sale. Because there is no new construction, prime office buildings are a good buy for investors. And, he said, investors who were scared away by the quake are now back in the market.

Another positive sign in the Valley office market is that there aren’t many large, contiguous blocks of space available for large tenants, observed Arthur Suazo, a broker with Julien J. Studley. “The few large blocks of space have been gobbled up,” he said. The one notable exception is Warner Center Plaza III in Woodland Hills, where only 12,000 of the 592,000 square feet in the building have been leased in the 2 1/2 years after its completion.

Commercial real estate brokers in Ventura County seem to have benefited the most from all the earthquake-related office and industrial facility moves. Grubb & Ellis statistics show that more than 1.5 million square feet of vacant office, industrial and retail space has been absorbed since January. This compares with 1.8 million square feet absorbed in all of 1993. Overall in Ventura County, the office vacancy rate stood at 17% in mid-1994, compared to a shocking 29% in 1991. All it takes is a handful of deals to tilt the statistics one way or another.

The good news for Ventura County can be traced in large part to a handful of transactions. In Oxnard, for example, GTE leased 115,000 square feet in the never-occupied Chevron building and Kinko’s leased 50,000 square feet at 1000 Town Center Drive. Now, it remains to be seen if the upward trend in Ventura County will hold steady.