More than 150,000 square feet of space is about to land in the Valley sublease market, as businesses struggle to keep up with rapidly changing economic conditions. Unable to accurately project their real estate needs and fearful that the space may not be available when they do need it, companies are rushing into leases only to find they’ve miscalculated their needs or that their requirements have changed almost overnight. Though the phenomenon isn’t limited to technology companies, they do seem to be the most common sublessors. A fluctuating stock market, consolidation and other factors are making advanced planning in the technology industry nearly impossible, which has a big impact on the real estate business. The situation has so far created four unwitting landlords in developments at M. David Paul’s Media Studios North in Burbank and Regent Properties’ West Hills Corporate Village, but brokers and other real estate experts say they expect more to follow as the economy grows increasingly volatile. “Tenants in the market who need space don’t have a lot of time to think decisions through,” said Rick Pearson, vice president with brokerage Cresa Partners. “You’re going to see more of this happening.” Consider these developments: -Equilon Enterprises LLC found itself with 10,000 square feet of space it did not need in its 62,000-square-foot offices in Media Studios North after relocating some of its employees to Dallas. -Alltel Corp. vacated its 30,000-square-foot offices in Media Studios North after consolidating the functions housed there in two other locations. -Virtualis never moved into its 41,000-square-foot offices in Media Studios North after reassessing its expansion needs. -Sterling Software is determining how much of its 135,000-square-foot lease in West Hills Corporate Village it will have to sublet after the company was acquired by Computer Associates. Brokers said another Media Studios North tenant, Microcadam Inc., is believed to be mulling a sublet for its 20,000-square-foot offices, although officials at the company said they could neither confirm nor deny those reports. In some cases, mergers or acquisitions changed the company’s strategy or expansion plans, affecting its real estate needs. Other companies miscalculated their rate of growth and ended up with more space than they required. The changes in their companies, coupled with the general shortage of office space, led many of these firms to rush into real estate deals. “It’s a very dynamic time now as regards commercial leasing, and a lot of companies are biting off more than they can chew,” said Brian Davies, a broker with Cresa Partners. “Companies of all kinds are forced now to take a five- or seven-year window of space simply because of the reality that they might not be able to grow in that building or afford the space (at the time they actually need it).” Sterling, which has been housed in 46,000 square feet in Warner Center, was bursting at the seams, and last April signed a 10-year lease for 135,000 square feet of space in West Hills Corporate Village. But in February, the company was acquired by Islandia, N.Y.-based Computer Associates, and because of efficiencies generated by the merger, finds it will no longer need so much additional space. “There are architects working on both coasts on how much they will occupy,” said Mark Sullivan, a broker with Julian J. Studley who represented the tenant and the landlord. “The requirement is downsized, but they will probably occupy a little more than half.” Equilon is also subleasing space as a result of a merger. The company was formed about two years ago as a joint venture by Texaco and Shell Oil Co., and it was in the thick of a reorganization when officials realized they had to make a move quickly. The company planned to relocate its crude oil brokers to Los Angeles, but officials were concerned that the city would impose a gross sales receipt tax on the function, a move that would cost Equilon about $1 million a year. So it signed a lease for 62,000 square feet in Burbank. But when the dust cleared, company officials decided to base the crude oil brokers in Dallas, where the company also has offices, leaving Equilon with more space than it needs in Burbank. “It’s the times we are in,” said Sharon Pfeiffer, real estate coordinator for Equiva Services LLC, an Equilon division. “We had to take what (space) we could even though our new company hadn’t jelled yet, and things kept changing and evolving.” Alltel, an information technology conglomerate, leased its Media Studios North space believing that its existing Los Angeles and San Diego offices could not accommodate the company’s growth, only to find that many of the functions it planned to handle in Burbank duplicated those already housed in other offices, said Rob Roedel, a spokesman for the company. Similarly, Virtualis, a software startup, planned to quadruple its employee ranks following a hefty round of financing, only to find that it only needed about half of the employees it had initially planned for. Longer lease terms When the economy was in the doldrums and office space was plentiful, tenants who were uncertain of their needs could usually negotiate favorable lease terms for shorter periods of time. But with vacancy rates in markets like Burbank running as low as 6 percent, according to the latest figures from Grubb & Ellis Co., landlords are not likely to be as accommodating. Developers leasing new buildings may be even less flexible. To satisfy financing companies, developers want to show they have creditworthy tenants committed to leases that are as long as possible. “Longer leases means you can get a longer mortgage or a bigger mortgage,” said Steve Marcussen, senior vice president with Cushman Realty Corp. “A few years ago, you could sign a three- or a five-year lease, but (with vacancies low) why would a landlord deal with short-term space if they can make them sign for seven years?” Marcussen, who is also president of the Los Angeles chapter of the National Association of Corporate Real Estate Executives, said that the group has for some time now discussed ways to create more-flexible leases that can accommodate changing needs, similar to the way hotels rent out their rooms. Some companies have turned to a de facto form of “hoteling.” Groups of workers who spend a lot of time outside the office share a bank of desks, but are not assigned their own space as a way to better control the amount of space the company requires. Others assign employees to work at home offices. But for many, subleasing will continue to be a widely used alternative. “There really isn’t an alternative,” said Pfeiffer of the predicament. “You try to negotiate the best deal and use whatever knowledge you have, and you know you can always sublease if you want to.”
