Realty Riddle: High Rents, Low Occupancy

The San Fernando Valley region’s third-quarter commercial real estate picture is a bit like toddlers painting a mural: a lot of activity that doesn’t necessarily follow a neat pattern.

Commercial real estate experts throughout the region described the market as healthy, evidenced by across-the-board increases in average rents compared with the second quarter.

But in a curious mix of signals, some areas that had the largest increase in rents--mostly the tech-heavy Conejo Valley and the West Valley--also saw an increase in office vacancy rates in the quarter that ended Sept. 30, according to a report from Grubb & Ellis. That would seem to contradict the typical laws of supply and demand.

Brokers in the Valley region, which stretches from Glendale to Thousand Oaks and north to Santa Clarita, said deals yet to come help explain the price hikes. They noted that with high-quality space now at a premium, and demand increasing, there are often many suitors for one site, bidding up the price.

“There’s a lot of activity, but it doesn’t show in the numbers,” said Tom Festa, a vice president with Grubb & Ellis, who said that a number of large leases are still in negotiations. “It’s simmering. And I think we’re going to see a lot of space being leased in the fourth quarter, which is atypical. I think the market is very active right now.”

Similarly, the third-quarter report from Cushman & Wakefield, the Los Angeles-based real estate services firm, mentioned tightening market conditions primarily due to “rampant” activity in the Central Valley submarket.

Grubb & Ellis, one of the region’s largest real estate brokerages, also found that:

* Average asking rents in all seven of the region’s submarkets increased, compared with the second quarter, even if by just a penny.

Using a so-called weighted average, the company found that the rate in the East Valley was $2.26 per month per square foot for Class A space (think gleaming office towers)--a one-cent rate hike over the second quarter. The highest asking rates could be found in Glendale: $2.42, up 18 cents from the second quarter, according to the report.

The biggest increase was seen in the Conejo Valley, where average asking rents for Class A space jumped to $2.03 from $1.79 per square foot in the second quarter.

The average asking rent for the region for all types of space (not including Glendale) was $1.96 per square foot, up just a notch from the $1.92 seen in the second quarter.

* The market in about half the region tightened somewhat, with the Central Valley (including Van Nuys, Encino, Northridge and Sherman Oaks) seeing a big drop in vacancy rate for Class A office space: from 15.1% in the second quarter to 10.7% in the third quarter. Burbank retained the title of tightest market, with a tiny 4.6% vacancy rate for Class A space and a 5.1% rate overall.

Cushman & Wakefield described the level of activity in Van Nuys as “phenomenal,” including the purchase by Genesis Properties of the 88,000-square-foot Hewlett Packard Building on Sepulveda Boulevard. Up to 40% of that structure will be used by Genesis’ corporate cousin, Studio City-based Genesis Interactive. That removes from the market space that had been vacant.

But in the booming Santa Clarita Valley, the Class A vacancy rate rose more than 6 percentage points, to 33.9%, according to Grubb & Ellis, as that market tried to absorb office space that came onto the market earlier in the year.

In the Conejo Valley, home to many of the region’s dot-com darlings, the Class A vacancy rate went from 9.6% in the second quarter to 17.5% in the third, the Grubb & Ellis report said, as the level of occupied space dropped by more than 58,000 square feet. Festa said that was due largely to Exxon moving out of leased space in Thousand Oaks.

Overall in the Valley region, the Grubb & Ellis report said the vacancy rate edged down from 10% in the second quarter to 9.4% for all classes of office space, including low-rise and older buildings.

(Because of differences in methodology, not all real estate brokers agree on things like vacancy rate and rents. Daum Commercial Real Estate, for example, put the Valley’s overall vacancy rate, excluding the Conejo Valley, at 13%. Cushman & Wakefield put the rate at 13.7%, including the Conejo Valley and Simi Valley.)

* The hefty increase in the Conejo Valley vacancy rate came with no new inventory added to the market. In fact, no new office buildings opened for tenant use anywhere in the region during the quarter, a slowdown from the inventory growth seen earlier in the year.

Still, because of growth in previous quarters, the total inventory of office space in the region is up 8.3% compared with a year ago, tallying 31.5 million square feet of rentable office space.

(During the quarter Pac Ten Partners and Conning Asset Management completed construction on phase one of Valencia Corporate Point, a 180,000 square-foot project that opened 100% vacant. Grubb & Ellis will include that development in its fourth-quarter figures.)

While the rate of growth may have slowed during the quarter, brokers from various companies said the market is doing well overall. Proof of that, they said, is found in the rental rates.

Bruce Frasco, a senior managing director at Charles Dunn, said Valley rents are increasing, but not as fast as Westside prices. And that, he said, is driving a number of corporate tenants over to this side of the hill.

“A lot of tenants from the Westside are starting to relocate to the Valley,” said Frasco, who has tracked real estate in the West Valley for 10 years. “In West L.A., office rents are fast approaching $3 a [square] foot.”

That makes even Glendale’s $2.42 a relative bargain. Still, that city continues to have one of the highest vacancy rates--18% overall--in the region.

Patrick Church, a senior associate at CB Richard Ellis in Glendale, said that’s largely a function of the rapid pace of development in the community. He noted that more than 700,000 square feet of office space has been added there this year.

Church pointed out that Warner Bros. signed a short-term lease for 60,000 square feet of space at 505 N. Brand Blvd., bringing more workers into the area in the current quarter.

“We’ve had more new development come on line in that area than any other market [in the region] has this year,” said Church, complaining that the city has gotten somewhat of a bad rap.

“So when you look at it, sure, our vacancy rate may be in the double digits. But a part of that is new inventory.”

While no new office projects opened for business during the quarter, a number of industrial sites were completed, including the Howard Business Park in Burbank, which is fully leased.

That should provide more breathing room in fairly tight industrial market.

The industrial vacancy rate for the Valley-Ventura region (which includes Ventura County’s most populous areas), had an overall vacancy rate of 6.1%, down just a hair from the 6.2% figure for the second quarter. Since the first quarter, when the rate was 5.6%, the region has added more than 2.5 million square feet of industrial space, or 1.55%.

At the same time, asking rents have remained flat: 54 cents per square foot for standard space, and 72 cents for buildings suitable for research and development work.

Nick Gregg, who tracks industrial real estate for CB Richard Ellis, said that’s a good indication that demand and supply are pretty well balanced.

“I’d say the market is healthy,” Gregg said. “Development is staying in line with absorption. When you get those things out of balance is when we have problems.”

*

Valley@Work runs each Tuesday. Karen Robinson-Jacobs can be reached at Karen.Robinson@latimes.com.