Commercial Developers’ Outlook Positive for 2001
The year 2001 looks to be full steam ahead for commercial real estate developments in the Valley, with projects ranging from the reopening of the Sherman Oaks Galleria to construction of a 300,000-square-foot office building in Warner Center.
Despite the slowing economy and talk of a recession, developers of the projects and the brokers leasing the space say they are optimistic that the Valley’s major office, industrial and retail developments will go forward without major hitches.
Not that everyone thinks the Valley and the rest of Southern California will emerge entirely unscathed if the national economy continues slowing or sinks into a recession.
Anyone considering new developments has to take the national slowdown into account, said Brett Foy, a vice president at Los Angeles-based Zelman Development Co., which is building 600,000 square feet of retail space on the 50-acre portion of the 103-acre Burbank Empire Center at the Golden State Freeway and Empire Avenue.
“It depends upon the project’s location,” Foy said. “I wouldn’t want to tackle what I would call a ‘B’ location this year, but our project is an ‘A’ location.”
Besides the 600,000 square feet of retail space that Zelman is developing and 300,000 square feet to be developed by Costco and Sears, Burbank Empire Center will include about 395,000 square feet of office space to be developed by Menlo Equities and two hotels to be built by two developers, now in escrow to buy six acres of land from Zelman.
About 85% of the space that Zelman will build is already leased to tenants, including Target, Lowe’s, Best Buy, Sportmart and Linens ‘n’ Things, Foy said.
He believes that demand for big-box space remains so strong in the Burbank market, and his project’s freeway-visible location is so desirable, that, “if we were starting over today without any tenants, we could probably get higher rents than we did when we signed the leases.”
Much of the commercial space in the Valley is built on a speculative basis, meaning the developer has no signed tenants at the time construction begins.
Some space is constructed on a build-to-suit basis, meaning the developer has a signed contract with a tenant that has agreed to either lease or buy the building when it is completed.
With some exceptions, much of the speculative space built in the Valley in recent years has been leased by the time construction was completed or within a few months afterward.
Industry experts say that how quickly the speculative space gets leased will be one measure of how the commercial real estate markets in the Valley and the rest of Southern California weather the coming economic storm.
But the feeling among developers and brokers seems to be that projects already on the boards for 2001 are being built in areas where development sites are scarce and demand will continue.
Space for big-box tenants is in demand throughout the Valley, according to Allen Young, a CB Richard Ellis broker who has worked on deals at Porter Ranch Town Center and is marketing space at Sherman Oaks Galleria on behalf of owner Douglas Emmett Co.
“We’re finishing the first 500,000 square feet of the power center [at Porter Ranch] and we think we can do another 500,000 square feet easily,” Young said. “We’ve talked to most of the big-box retailers who aren’t already there and almost every one of them said ‘When you’re ready to go, let us know.’ ”
About 150,000 square feet of office space leased to Warner Bros. and a few shops are due to open this quarter at Sherman Oaks Galleria, where remodeling of the main shopping area is due to be finished in the summer, Young said. He considers the new Galleria a good bet to succeed despite any national economic cooling.
Development company M. David Paul is confident enough in the continued demand for office space that it has broken ground on the first phase of a 395,000-square-foot speculative project in Burbank, according to Jeff Worthe, a principal at the company.
Called The Pinnacle, the $80-million project is at 3400 Olive Ave.
Among other office projects on the boards for later this year is the second phase of LNR Warner Center at Canoga Avenue and Burbank Boulevard in Woodland Hills, which will be about 90,000 square feet of speculative office space, according to John Sabourin, a Colliers Seeley International broker marketing it for developer Lennar Partners of Irvine.
The first phase of LNR consists of two buildings of 178,000 square feet each that began as speculative space, but most of the space was leased by Health Net before the first building was completed late last year.
Construction has begun on the second building, scheduled to be completed in the fall.
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While developers may be sanguine about office space at close-in Valley sites, not all of them consider speculative office development a slam dunk in farther-out markets such as the Santa Clarita Valley.
Office space hasn’t caught on in Santa Clarita as strongly as industrial space, according to Thomas Lee, chairman and chief executive of Newhall Land & Farming Co., who said that although industrial space has leased quickly at the company’s Valencia Business Park, demand for office space has not met expectations of Newhall and some other developers.
Newhall Land is starting the year with plans to offer about 40 or 50 acres of industrial land for development and will offer more acreage if demand is strong enough later in the year, Lee said.
Another view of what’s in store this year comes from Cary J. Lefton, a principal at Agora Realty, which hopes to break ground in March on new retail space at its 220,000-square-foot Plaza del Valle, a $20-million combination renovation and new construction project at Chase Street and Van Nuys Boulevard, Panorama City.
“We’re in more of a blue-collar area, and I really don’t think we’re going to be much affected by the national slowdown,” Lefton said. “I think it’s going to be more of a slowdown in the tech companies, and I don’t think we have as many e-commerce or dot-com companies in the Valley as they do on the Westside.”
Lefton said Agora already has signed a deal with Goodwill Industries to open a 4,200-square-foot computer discount center and has leased a site to Banco Popular, which will open a 3,000-square-foot branch at Plaza del Valle.
Many of the center’s tenants will be mom-and-pop merchants who don’t typically sign leases far in advance, as big national retailers do, so Agora will be leasing the rest of the space closer to when construction is finished, Lefton said.
