Commercial Real Estate Activity Has Picked Up Recently

In the first two months of this year, leasing activity and sales have ticked up enough to give even the most pessimistic commercial real estate brokers reason to claim a “cautiously optimistic” viewpoint. “We have done more leasing over the past four months than we did over the last two years,” said Todd Nathanson, president of Encino-based illi Commercial Real Estate, who specializes in retail leasing, management and sales. “We noticed a correction a year and a half ago. Part of the correction was that our (landlord) clients came to terms with lower lease rates.” Both the number of sales and the price each deal is selling for have increased in North Los Angeles County and the Tri-cities of Burbank, Glendale and Pasadena, according to data from Real Capital Analytics. In the first two months of 2010, only two deals totaling $14 million traded in North Los Angeles County; but in the first two months of 2011, eight properties have traded hands for a total of $164 million, the RCA data showed. The first few months of 2010, were not quite so anemic in the Tri-cities area, where the sales total was $99.4 million for the 11 properties that traded hands, but in the first few months of this year that number more than doubled at $267 million for 20 properties, the RCA data showed. “For our company, we started to see an uptick in October/November 2009,” said Mike Tingus, president of Lee & Associates-LA North/Ventura Inc. “We started seeing people coming back into the market primarily on the user side in industrial and office.” The uptick began with industrial, office, then retail and halfway through 2010, multi-family saw increased activity, said Tingus, who is projecting a four to five percent annual rental increase on apartments, because of the difficulty of getting into a home. Giving back In the office leasing market, however, some of the activity has been companies renewing at lower rates and giving back space, Tingus said. The overall vacancy rate for office in greater Los Angeles was 18 percent in the fourth quarter, an 8.8 percent increase from the 16.6 percent vacancy rate posted in fourth quarter 2009, according to a CB Richard Ellis office market report. The San Fernando Valley submarket experienced the area’s second highest vacancy rate in fourth quarter 2010 hitting 20.8 percent, the report states. “It’s not surprising considering we are coming out of the worst recession in most people’s lifetimes,” said David Solomon, a senior vice president in the Universal City office of CB Richard Ellis. “It is consistent with the general overall economy.” The general economic malaise and lack of job growth is certainly a factor in the high vacancy numbers, but some submarkets have unique challenges, according to brokers. For instance, the 7.4 million Woodland Hills submarket considered one of the more sought after office markets has a high vacancy level, because LNR Property delivered the final 500,000 square foot segment of its 7-building Warner Center office campus in 2008 on spec and the building is 50 percent leased, Solomon said. The size of the 7.4 million square foot Woodland Hills market, most of which is the Warner Center development, helped slant the vacancy rate upward, Solomon said. “The vacancy rate on the 20 million square feet we track in the San Fernando Valley is a weighted average,” Solomon said. “If you consider that Woodland Hills has 7.4 million square feet – and the next largest submarket is Encino at 3.5 million square feet. The Encino and Sherman Oaks submarkets have 15.5 percent and 15.8 percent vacancy rates (much lower than the 20 percent average).” Countrywide factor The employers who created the most concern for office and industrial owners at the height of the economic meltdown – Countrywide Financial and Amgen – did not end up putting as much space back on the market as originally expected, however. Countrywide owned 2.4 million square feet of office and industrial space in the San Fernando Valley and Conejo Valley when Bank of America purchased the company. If Bank of America had drastically reduced the size of its operations by closing those offices or reducing the workforce – as often occurs following a buyout – it would have sent shockwaves through the office market. “When Countrywide purchased the buildings it owned, the prices were low and it got a deal, which likely factored into Bank of America’s decision to retain the buildings,” Tingus said. What Countrywide didn’t retain has been absorbed by the market. Countrywide sold about 82,000 square feet in Calabasas to Digital Theater Systems in 2008 prior to the Bank of America buyout, said Tom Dwyer, a senior vice president in the Camarillo office of CB Richard Ellis. An industrial user purchased a 70,000 square foot office building and 100,000 square feet of industrial space from Bank of America last year, Dwyer said. Amgen’s decision to put more emphasis on growing offices it has in other states and countries has had a greater impact on the office and industrial market in Conejo Valley, but the situation is not as dire as what was projected when Amgen was laying off hundreds of people from its Conejo Valley offices in 2007. While Amgen has come back strongly from 2007, Dwyer said he doesn’t anticipate the company will expand its offices in the area, Dwyer said. Amgen, one of the largest employers in the Conejo Valley, has 3 million square feet of office space and labs, Dwyer said. Of that number, Amgen put a half million square feet on the market for sublease in fourth quarter 2008, but currently is marketing 300,000 square feet for sublease in Thousand Oaks, Dwyer said. The lease on 200,000 square feet in two office buildings expires in October, but Dwyer said he expects that Amgen will not find a subtenant and the space will revert to the landlord, who will lease it. He also said that Amgen will likely continue to try to sublease the remaining unoccupied 100,000 square feet that has a lease expiration of 2019. Retail market The region’s retail market, recently impacted by the closure of several Borders Bookstores, is sending mixed signals. On the plus side, forecasters are predicting retail sales to grow at an annual rate of 4.8 percent over the next five years, according to a CBRE fourth quarter retail market report. “Clearly rents are increasing and the vacancy is being absorbed,” Nathanson said. “Lease rates are up by close to 17 percent.” The overall vacancy rate in the retail markets of greater Los Angeles is 6.2 percent, considered a healthy rate, but half of the region’s submarkets experienced negative absorption, among those Santa Clarita and the Tri-cities submarkets. The San Fernando Valley experienced positive absorption, but it was only 2,596 square feet. Multi-family market The challenges in the single-family home market have translated to good news in the multi-family market. “There is a transitional shift toward a renter nation,” Schiff said. “The ratio of people renting rather than owning hit 66.5 percent by year-end 2010. That is a 12-year low in the ratio of people owning to renting on a national basis.” Asking rents were projected to increase by 1.8 percent to $1,395 in the Greater Los Angeles market in 2011 and the vacancy level was expected to drop by 50 basis points to 4.4 percent this year, according to the 2011 annual report from Marcus & Millichap. “Rents bottomed out eight to ten months ago,” said Dean Zander, a partner in the Los Angeles office of Hendricks & Partners. “When owners are sending out renewals, they are including rent increases.”