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Thursday, Mar 28, 2024

Overview: Tale of Two Markets

The San Fernando Valley regional commercial real estate market over the last year was a tale of two kinds, one from before the liquidity crisis and the one since. In his presentation for the AIR Real Estate Market Review and Forecast, Cushman & Wakefield Senior Director Brad Koehler described a landscape that reflected hits by the sub-prime mortgage meltdown. But there was also a tight market for available space. A negative net absorption rate of industrial and office space in the San Fernando Valley and Santa Clarita in 2007 demonstrated the impacts of the softening demand overall. Some data reveal a more nuanced tale about specific submarkets over a shorter, more recent, period. Colliers International Property Consultant’s report of the fourth quarter shows a net absorption rate during the period measured for the Conejo Valley (94,900 square feet) and both the East (57,900 square feet) and Central (77,400 square feet) San Fernando Valley submarkets. Net absorption is a measure of the space available through leasing, and is reported as negative when space returns to the market when more tenants leave than lease, or when new product becomes available. Negative net absorption existed in Q4 in the West Valley (-58,700 square feet), the Simi Valley and Moorpark submarket (-64,100 square feet), and Santa Clarita (-98,000 square feet), according to the Colliers’ report. Yet the downward pressure on prices was mitigated by the lack of new product coming on the market, as revealed by a general increase in the average sale price for buildings less than 50,000 square feet, Colliers reported. NAI Capital crunched numbers in their Year-End 2007 Market Report, and blamed much of the market softening on office space released from the mortgage-finance industry. NAI cited a 2006 vacancy rate for the San Fernando Valley overall at 7.2 percent that climbed to 10.4 percent as of Dec. 31. It found a negative net absorption of 482,900 square feet, a shrinkage rate of 1.9 percent within the boundaries they surveyed. The firm predicts net absorption to be relatively modest in 2008, again citing the continued release from closing mortgage offices. Future projects There are some major projects due to deliver product in the coming years. Thomas Properties Group’s Metro Studio @ Lankershim project will eventually have as much as 1.2 million square feet of office and television studio space, geared to the needs of its planned tenant, NBC Universal. The $3 billion, decade-long development is still formulating its EIR. Mall developer Westfield LLC is adding 360,000 square feet of office space to the West Valley with its Village at Topanga project. It hopes to break ground by 2010. Prices for commercial buildings increased by 8.4 percent over the year, the Cushman & Wakefield report shows. Sale prices contained in the report note a $147.29 per square foot price for industrial property below 50,000 square feet and $102.70 per square foot price for industrial space above 50,000 square feet That fits with what Voit Development Companies’ Tim Regan described in relation to the North Valley Commerce Center Project that Voit is developing. “The problem is the scarcity of land,” the developer’s vice president of development and acquisitions said. “The land that is available is smaller parcels and they’re expensive.” NAI noted that construction of new space has slowed, with 255,200 square feet under way at year’s end. That will only add 0.9 percent to the base of office space available. Last year, the sale price of office space was reported to average $262.40 square feet for facilities under 50,000 square feet and $214.75 per square feet for spaces larger. Koehler’s review of last year’s market cited vacancy rates of 2 percent for industrial property and 8.73 percent for office space. Industrial land sold for an average of $27.08 per square foot. Office space averaged a sale price of $42.98 per square foot Regan said recent interest rate cuts would create opportunities for some buyers of commercial properties. “Because rates are historically low, for those with good credit who can get an SBA loan and finance a building, it makes sense to do,” he said, although, he said, “No one wants to sell; they want to hold and lease.” Vacancy rates Total industrial vacancy rates were lowest in the Central San Fernando Valley submarket, just 1.2 percent, Colliers reported, which is well below the highest rate of 8.7 percent found in Santa Clarita and the 7.4 percent rate in the Conejo Valley. NAI predicts office vacancy rates to climb to 11 percent to 12 percent, slowing the “strong rent-growth of recent quarters.” Colliers’s report declared, “Construction has been restrained thoughout the area, due to a lack of vacant land and intense competition for any land that become available from residential and retail developers. “Rental rates appear highly likely to climb in the near future, even though they are already at high levels. Sales prices appear likely to remain high,” the Colliers analysis predicted. NAI attributed a negative net absorption rate for industrial product in the Valley (-619,100 square feet) due to shrinkage of occupied space. “Asking rental rates climbed 8.9 percent to 68 cents a square foot per month triple net,” NAI stated. It was the second highest rental rate in the greater L.A. region, behind Orange County. Average sale prices climbed to $136 per square foot, “a very high level,” NAI said. No downward pressure on prices is predicted, because the firm expects vacancies will remain “exceptionally low.” Regan agreed. “The market is tight out there,” he said. Factors weave together to create a stable revenue stream for property owners who lease. “No one wants to leave the Valley,” he said. “There’s still a group who will pay a premium to stay in the Valley, closer to the ports,” Regan said, since many businesses are dependent upon the shipping and distribution access, they have to stay.

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