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Friday, Mar 29, 2024

Slow Recovery Ahead for Urban Tower Sector

 Vacancy ran rampant in the San Fernando Valley during the first quarter with the office sector front and center.That was the upshot of a first-quarter study put out by Savills, and in a conversation with the Business Journal, the downtown Los Angeles-based real estate firm’s Southern California Research Director Mike Soto broke down the stories behind the numbers.Office space was off to a very slow start in the new year.As Soto put it, “23.6 percent total availability (across Los Angeles) is no joke. It’s going to take a lot of leasing activity to get that number down again.”That said, there is reason to rejoice as employment numbers rose last month. According to the U.S. Labor Department, nonfarm payrolls rose by a surprising 916,000 in March — the biggest surge since last summer — while the unemployment rate declined to 6 percent.

“Things are definitely better today than they were a year ago when the world was falling apart,” Soto noted.Savills said that part of the reason as to why the office quadrant has not made a speedy rebound lies in its very nature.“The overall office sector usually lags the overall economy,” Soto said. “Just because the economy might roar back, it doesn’t mean the office sector will roar back as well.”He noted that companies are going to be “more deliberate about getting back into the office.”At the same time, throughout the pandemic, “landlords were not coming down on their asking rents,” Soto explained.

The institutionalized, more capitalized building owners saw the COVID-19 period as a “black swan event”’ and thought, “if we can get through the pandemic, (companies will meet rent),” Soto said.There were some big office leases signed last year in Los Angeles County, but they were mostly on brand new projects, not existing product, which was largely abandoned by the thousands of square feet.Burbank as ‘outlier’In terms of geography, there was one submarket in the San Fernando Valley which did not see its vacancy numbers skyrocket, mainly because of the entertainment industry.“Burbank is the outlier,” Soto said. “If you look at the availability rate (7.8 percent), it’s been COVID proof.”Compare Burbank’s vacancy with Santa Monica, which in a year went from 10 to 30 percent vacancy. Similarly, Valley communities such as North Hollywood and Universal City climbed to 30 percent, which is “really high for that area.”“Companies that moved preferred to go to Burbank,” Soto said.One surprise: Warner Center hovered year-over-year at similar numbers; 17.9 percent to last year’s 17.6 percent.

“That’s virtually no change,” Soto said, explaining how Woodland Hills’ institutional businesses – insurance, home mortgage, etc. – need tower space. When said companies move from Woodland Hills, they tend to relocate to a nearby West Valley destination such as Calabasas or as far out as Westlake Village.The key to Burbank’s success has been an entertainment industry which may have taken a hit with theatrical but continued to thrive with streaming services.“Entertainment has been booming throughout the pandemic,” Soto said. “Even though they couldn’t shoot (live-action features), at least they could do animation or documentaries.”Soto anticipates that once production ramps up in full, Burbank will continue to benefit as will North Hollywood, which will see Burbank’s overage.

What may not happen is a big Hollywood spillover into Glendale, which remains institutional with businesses such as the insurance firms. Despite being next door to Burbank, Glendale currently has 21.7 percent vacancy over 20.8 percent this time last year. It has not been attractive to Hollywood because of those towers.“The type of buildings in Glendale (are undesirable),” Soto explained. “Burbank has more low-rise buildings, (campuses, etc.) with editing bays. Glendale has a lot of high rises.”In the coming quarters, Savills projects that office leasing will inch up.“The recovery will be slower than most people think,” Soto said. “The office sector tends to lag the overall economy.”

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.

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