Office/22 inches/LK1ST/mike2nd By SHELLY GARCIA Staff Reporter San Fernando Valley office rents, which have held steady for the past year, have begun to rise dramatically, and could continue to increase at a double-digit annualized rate over the next 12 months in some segments, real estate brokers say. Although demand for office space has generally cooled over the past six months, a shortage of class-A buildings in such prime Valley areas as Warner Center and Sherman Oaks is expected to drive rents 9 percent higher Valleywide, and as much as 15 percent higher in the area’s most desirable markets. “With no new product, and no tenants moving out, we’re able to push rents higher,” said Donald W. Hudson, Jr., senior vice president and director of leasing for Warner Center Properties. Brokers point out there has been virtually no new office development in the Valley in about seven years. In the meantime, businesses have continued to move in and expand in the area. The class-A office vacancy rate in the Valley market was 13.4 percent as of the end of the third quarter, according to Cushman & Wakefield Inc., and that rate is expected to inch downward in the next 12 months. Continued strength is being displayed by the Tri-Cities area of Burbank, Glendale and Pasadena, where the office vacancy rate dropped to 8.6 percent in the third quarter, lower than any other submarket in Los Angeles County. That market will likely soften in the months ahead, however, as entertainment-industry growth slackens and some major new projects come on line. Farther west, the dramatic rise in occupancy at Warner Center’s Plaza III tower, from about 20 percent last year to over 90 percent currently, has played a pivotal role in the changing rental landscape. As long as the tower was vacant, competitors wishing to raise rents in the area ran a substantial risk of losing tenants. But with Plaza III and the Trillium (the other premier Valley property) virtually full, and many of the tenants locked in for the next three to six years, tenants looking for space don’t have many options. “Anyone who needs 25,000 square feet or more is going to have a hard time,” said John Battle, a broker with Lee & Associates. “People are going to have to pay these rents or go to areas where they think they’re going to get a better deal.” Monthly rental rates at Plaza III were running $1.75 per square foot last July and are currently at $2.40. Lease rates at the Trillium have risen from $2.05 to $2.50 per square foot in the past quarter. And in Calabasas, where average monthly office rents are hovering around $1.90 a foot, the Kilroy Calabasas Associates project under development is asking $2.05, nearly 8 percent more than the average. Over the next 12 months, brokers say, expect even more increases. Marcus & Millichap projects an average 9 percent increase in rents on class-A Valley office properties, despite the slowdown in employment growth and recent signs that leasing activity may be slowing. “Demand is still increasing,” said Jonathan A. Weiss, regional manager of Marcus & Millichap. “Is it increasing at the same rate as it did? No, but as it increases, it’s going to increase rents.” Although last year’s employment boom in the entertainment industry has slowed, other areas of the economy, such as technology, are still experiencing strong growth, and there is no downsizing on the horizon for any industry. Marcus & Millichap projects that Valley employment overall will increase by 2.7 percent in the next year. There are some problems on the horizon. Glendale Plaza, a high-rise under development by PacTen Partners, has failed to attract any tenants and that has led to speculation that other developers may put their projects on hold. But that would only further fuel rent increases, brokers said, because it would restrict the supply of new space as demand increases. “The fundamentals of the market are still solid,” said Doug Marlow, senior vice president with CB Richard Ellis Inc. “Single-digit vacancies (in Burbank) and more tenants continuing to seek space in the area will create an inflationary environment for rent increases.” Strength in Burbank and Glendale can also have a positive impact on Warner Center, the Ventura (101) Freeway corridor, and points farther west, brokers said. Average rental rates in the East Valley, which has largely attracted entertainment clients until now, range from $2.16 to $3 a square foot per month, according to Cushman Realty. That means owners of buildings in the Ventura Freeway corridor can raise rents and still remain below the cost of comparable space in such areas as Burbank and Warner Center. “With Warner Center increasing and with the East Valley already increased, there will be pressure to raise rents in other areas even though there may not be the same demand,” said Jim Lindvall, a broker with Grubb & Ellis Co. But most important, brokers said, is the sheer dearth of available class-A space, the type of space that typically attracts the companies requiring the largest blocks of space. As things now stand, some of the area’s most exclusive class-A buildings cannot accommodate tenants looking for 20,000 square feet of space or more. The largest contiguous block of space available in the Warner Center towers, for example, is 13,000 square feet. At McNeill Plaza, a 375,000-square-foot high-rise in Sherman Oaks, there are two floors of 18,000 square feet each available. The rest of the vacant space ranges from 8,400 square feet to 1,200 square feet. “They’re all little holes,” said Bill Inglis, the Grubb & Ellis broker who represents the property.