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Thursday, Mar 28, 2024

OFFICES—Supply of Office Space Could Outstrip Demand as Vacancies Begin to Appear

Signs that the economic slowdown has begun to affect the real estate market are showing up across the San Fernando Valley. Some companies are dumping office space back on the market, the result of divisions closed or expansion plans scuttled. Others that had placed assignments for new office space with brokers have tabled their plans while they wait for a clearer economic picture to emerge. Though the situation is nowhere near the recessionary climate that engulfed the region’s real estate sector in the last decade, it now looks as though supply may soon outstrip demand in the coming months and brokers expect to see office vacancies rise. “There’s over 700,000 square feet of buildings just finishing up construction, and I don’t see them getting leased up in short order,” said Brian Forster, executive vice president at TOLD Partners. “It may be a couple years before they can absorb that space.” At the close of 2000, office vacancy rates were still hovering under 10 percent in most areas of the Valley. But as entertainment companies revise their business models at the east end of the Valley, and high tech companies tighten their belts at the west end, a significant amount of existing office space has landed back on the market, in direct competition with new space coming on line. Some companies, like Homestore.com, have forged ahead with planned moves and expansions, but others are delaying decisions and still others have pulled back entirely. “All the big players keep sniffing around, but no one is landing,” said Forster. Consider these recent developments: > Xircom Inc., on the heels of a revenue dip and net loss for the first quarter of 2001, has placed a 200,000-square-foot build-to-suit at Conejo Spectrum on the sublease market. The company had planned to move into its new quarters this spring. > Warner Bros., which earlier announced plans to sell its 130 retail stores, has placed 135,000 square feet of Burbank office space on the sublease market, much of it the former retail division headquarters offices. IBM, which was considering a 15,000-square-foot office lease in the Central Valley, has put its assignment on hold. “There’s been a number of projects out there that were put on hold,” said Brian Hennessey, Grubb & Ellis vice president. “We need some more positive indicators before the activity level picks up again, and I’m hopeful that’s going to happen. But until that happens, we’re all in a vacuum.” Burbank in unique situation A slowdown in Burbank is particularly worrisome because there is so much office space currently under construction there. Some brokers worry that the new development, coupled with the anticipated entertainment industry strike this spring, could have a severe impact on real estate in the east Valley communities. Paul Stockwell, corporate managing director at brokerage Julien J. Studley Inc., does not expect the entertainment strike to have a significant impact on the Burbank real estate market. He reasons that the space needs for major studios are determined by long-term strategies, not the number of film productions underway at any given time. Still, he points out that the increased availability of sublease space coupled with the construction underway is changing the face of what had been a bullish market. “As it relates to Burbank, with 800,000 feet of new construction, there’s probably some nervous people,” Stockwell said. “We’re certainly bordering on a different time and a time where everybody has to be very creative.” The news is not all bleak. A deal with Allied Interstate Inc. brings Investment Development Services’ just-completed Westlake North Business Park occupancy to 56 percent, or about 183,000 of the project’s 327,000 square feet. Silagi Development & Management has leased more than 90 percent of a 50,000-square-foot Agoura Hills office building the company completed last April and is about two-thirds leased on a second, 45,000-square-foot building in the project. Westlake Plaza Centre III, an 81,500-square-foot office building due to be completed in June, is expected to reach 70 percent occupancy this month, said Tony Principe, a broker with Westcord Commercial Real Estate Services, who is marketing the property. Brokers and developers point to these deals and the stability in rental rates, which, so far at least, have not come down from the record highs reached last year. They conclude the market has simply shifted from its previously fevered pace to a more stable, albeit slower, growth rate. “I just think everyone is so used to the ridiculous amount of growth we’ve had, and now it’s going back to your steady pace,” said Festa at Grubb & Ellis. “No one likes normality when we’ve had such rapid expansion.” At the same time, brokers that once hoped to attract large users are taking a more flexible approach to their marketing in an attempt to address the changing dynamics of the market. Forster at TOLD said he hoped to market the 134,000-square-foot Westlake Corporate Center to large tenants, but those tenants have been elusive. “I thought we would be leased by now,” Forster said. “The building is great, but all the big companies are sitting on the sidelines seeing how the economy goes. We’re going to start dividing the building up and going down as low as 10,000 square feet.”

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