Westside Office Rental Prices a Boon for Valley

The office market in the San Fernando Valley region got a bit more snug in 2000, as vacancy rates for office properties dropped into single digits at year’s end.

The vacancy rate for the region--including Glendale, Burbank and the Santa Clarita and Conejo valleys--closed the year at 9.5%, according to a new report from Grubb & Ellis.

That’s nearly 2 percentage points below the 11.2% mark at the end of 1999 and 2 points below the Los Angeles County average of 11.5%.

At the same time, the average asking rent in the region jumped by 14 cents during the year--from $2.17 per square foot at the end of 1999 to $2.31 in the quarter that ended Dec. 31. That was a hair below the $2.36 average for Los Angeles County--a figure elevated by the ever-escalating rents on the Westside.

Rents there rose from $2.72 per square foot in late 1999 to $3.13 at the end of 2000.

But Valley brokers said the surging fees on the Westside, coupled with the dot-com downturn, are luring some companies to this side of the hill. And that influx, they say, should help blunt the impact of an economic slowdown some have predicted for 2001.

“We had a company that just came up from the Westside,” said Sam Monempour, a senior associate with Grubb & Ellis. “Part of that is the rental rates being as low as they are out here. It makes more sense.”

Overall, Valley-area brokers said, 2000 was strong, even if it ended with more whimper than bang.

“The year started out awesome,” said Monempour. “Then by the third and fourth quarter you had more of a downturn in the market. There are a lot [of companies] who were in the market who are no longer in the market. They were looking for maybe double their space, and now they’re not.”

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Said Jim Lindvall, senior vice president of Grubb & Ellis, “If you compared March of 2000 with November 2000, the leasing activity component [early in the year] was taken up with start-ups and growing companies.”

By November, he said, the activity was about cut in half.

Even with the slowdown, most brokers said, 2000 finished ahead of 1999.

“A 10% market is still a very strong market,” said David Solomon, a senior associate in the Sherman Oaks office of CB Richard Ellis. Using a different database, that firm gives a preliminary year-end Valley vacancy rate (not counting Glendale and Burbank) of 10% to 12%. “Rental rates are higher and continue to go up, but it’s not like the Westside.”

The snuggest fit in the region (and the area tied for second place in the county) was Burbank, with a skimpy vacancy rate of 3.9%, up from 2.8% in the third quarter but just a notch higher than the year-ago rate of 3.3%, according to the Grubb & Ellis figures.

And the Santa Clarita Valley market again led the county with the highest vacancy rate, even though in the fourth quarter the rate fell below 30% (to 29.8%) for the first time in 2000, Grubb & Ellis reports.

The north county area, which contains about 4% of the office space in the Valley region, accounted for a disproportionate 13% of the vacant space, the report showed.

But several brokers who work the area said the numbers don’t tell the whole story.

“The market is not as bad off as it looks on paper,” said Doug Marlow, senior vice president of CB Richard Ellis. “I think you’ll see in 2001 a pretty significant drop in the overall vacancy rate in the market, based on the [companies] that are looking for space today in Valencia.”

Marlow attributed the region’s elevated vacancy rate to deals that didn’t materialize and the addition of new space. That company’s figures show an addition of about 200,000 square feet of office space during the year.

“Had some of the deals we were chasing materialized, we wouldn’t be having this conversation,” said Marlow.

Between the extremes of Burbank and Santa Clarita was the rest of the Valley region, where nearly every sub-market posted a sub-10% vacancy rate.

Even Glendale, which was in the mid to high teens for most of the year, slimmed down for New Year’s Eve, ending the year at 11.7%.

In fact, all of the sub-markets except Burbank had skinnier vacancy rates than a year ago--and the rate in Burbank rose by just 0.6 percentage points.

Brokers said the local market looks particularly strong when measuring net absorption--essentially the amount of space that came off the market. Net absorption for the region increased by nearly 40%, from 1.1 million square feet of space in 1999 to 1.5 million last year, according to a preliminary Grubb & Ellis report.

And even with an economic “soft landing” anticipated for 2001, area brokers say the region should be able to absorb the 1.94 million square feet of space now under construction in the region.

“For this marketplace, it’s not an oversupply, even with the reversing trends we’ve seen in West L.A.,” said Lindvall, alluding to the increased vacancy rate that region has experienced during 2000.

“I’d get a little nervous if there was additional product to be put into the pipeline right now,” he added. “But with the current level of construction, I don’t think we’re going to see an oversupply. It may not lease quite as quickly as the developers might have liked, but I don’t think we’re going to see an unraveling of the market.

“The market is strong enough to absorb that space.”

Michael LaRocque, executive vice president of Daum Commercial Real Estate, said 2000 was strong for industrial real estate as well, with prices edging upward for both rents and sales. That continues a trend established in 1999, he said.

“I think that ’99 was kind of a watershed year,” said LaRocque, who has tracked real estate in the Valley for 20 years. “It was a banner year that [affected] a lot of property that had been sitting. And 2000 continued the pace that was set in ’99.

“Many people thought there would be a slowdown in early 2000 . . . but I personally didn’t see it slowing down at all.”

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According to the Grubb & Ellis report, the region overall ended 2000 with an industrial vacancy rate of 3.2%, down from 5.3% at the end of 1999. The vacancy rate dropped even though the region added 1.2 million square feet of space to the mix.

“There have been some major projects in the Valley,” said LaRocque. “They’ve been absorbed almost as soon as they were built. For the broker, you were looking more for the product than for the tenant or buyer.”

The average asking rent for standard industrial space inched up 2 cents per square foot--from 59 cents in late ’99 to 61 cents in the fourth quarter of 2000. Rents for so-called R&D; space (the industrial/office hybrid favored by some high-tech start-ups) slipped by 2 cents as the fortunes of many tech companies slid. The rate dipped from 77 cents per square foot to 75 cents in late 2000.

Sales and leasing activity for the year was basically flat, coming in at about 6 million square feet of industrial space leased or sold during the year.

Any clouds on the horizon for 2001? LaRocque said he’s keeping his eye on developments with the potential entertainment strike and the ongoing energy crisis.

“A lot of the industry that we have in the Valley is related to entertainment,” he said. “Everybody is really nervous about that.”

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

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Office, Industrial Space

* Commercial market: Vacancy rates for office and industrial space in the San Fernando Valley area for the fourth quarter ended Dec. 31:

Source: Grubb & Elli

Office, Industrial Space, Los Angeles Times