Real Estate Column—Economic Slowdown Finally Hits Local Office Market

Everyday someone else in the national media asks the question, “How bad will it get before it gets better?” It’s probably time to ask the same thing of the local real estate market. Until now, office real estate activity in the San Fernando Valley has kept a steady pace, even as news of chinks in the economic armor of other sectors circled the region. And, except for a few, albeit high-profile, blips on the real estate radar screen from companies that vacated space or backed out of lease deals, vacancy and absorption rates held fast to positive territory. But in the first quarter of 2001, net absorption moved into negative territory in nearly every Valley submarket, a clear sign that the slowdown has begun. To be sure, there are tenants who continue to need, and shop for, office space. But the most recent figures suggest their numbers are declining, while the stock of space being vacated is on the rise. “What the numbers show is that, with the uncertainty of the economy, everyone just plain slowed down,” said Tom Festa, a broker with Grubb & Ellis. “The question is how deep a downturn are we going to go through.” For the Valley, excluding Burbank and Glendale, office market net absorption was a negative 251,417 square feet, meaning 251,417 more square feet of space was vacated than was leased in the first quarter, according to data compiled by Grubb & Ellis. In Burbank, net absorption registered a negative 49,417 square feet, and Glendale recorded a negative absorption of 139,140 square feet. Vacancy rates dropped as well. Throughout the region, again excluding Burbank and Glendale, office vacancies in the first quarter of the year dropped to 12.1 percent, from 10.1 percent in the fourth quarter of 2000 and 10.7 percent for the first quarter a year ago, the Grubb & Ellis data revealed. In Burbank, vacancies rose nearly four percentage points to 7.7 percent, from 3.9 percent in the fourth quarter of 2000 and 5.8 percent from the first quarter of 2000. Glendale vacancy rates bumped up nearly two percentage points to 13.9 percent from 11.7 percent in the fourth quarter of 2000. Current vacancies there, however, remained well under the rates of a year ago, when vacancies reached 16.2 percent. Besides Burbank, the hardest hit areas in the first quarter of the year were the East Valley, where vacancies rose 7 percent to 15.1 percent, from 8.4 percent in the fourth quarter of 2000, and the Conejo Valley, where vacancies rose by 4 percentage points to 13.7 percent from 9.7 percent in the final quarter of last year. The West Valley held up best of any of the area’s submarkets, seeing vacancies inch up to 10.3 percent in the first quarter of the year, from 9.6 percent in the final quarter of 2000. Although absorption in the West Valley also moved into negative territory 89,248 more square feet of space was vacated than was leased brokers believe the shortfall provides no cause for alarm. Significant portions of new construction in the West Valley, such as LNR Warner Center, have leased up, indicating demand is keeping up with the new supply. Suggesting that no one is ready to panic yet, rents remained relatively steady in the first quarter of the year as well at an average of $2.30 a square foot for Class A office space, excluding Burbank and Glendale. Burbank asking rents dipped to $2.62 per square foot for Class A office space, from $2.77 in the fourth quarter of last year, a likely result of the stock of sublease vacancies that has come into that market. Glendale’s asking Class A office rent averaged $2.41, an increase over the fourth quarter of 2000 when average rents for Class A space were $2.29. Valencia Sales Three deals have closed in the Valencia Commerce Center. PMRealty Advisors acquired three industrial buildings totaling 324,945 square feet for $20 million. The buildings at Valencia Commerceplex I and II are designed for warehouse and distribution uses. Kimball Microelectronics Group, makers of electronic circuit boards and components, has acquired a 40,000-square-foot building at 28575 Livingston Ave. The purchase price was $5 million. AlleCure Corp., a biotech company, has acquired 5.3 acres of land and a 98,000-square-foot building at 28903 Avenue Paine in the center. The purchase price was not disclosed. Craig Peters, Doug Sonderegger, Barbara Emmons and Greg Barsamian of CB Richard Ellis, Inc. represented the seller in the PMRealty and AlleCure transactions. They also represented the buyer in the PMRealty transaction. Peters and Sonderegger were also the brokers for buyer and seller, Intertex Holding Co., in the Kimball transaction. Independent broker Robert Stratton represented AlleCure in that deal. Living Out Loud in Chatsworth M & K; Sound Corp. makers of loudspeakers for high-performance venues like movie theaters and residential use, has leased a 55,563-square-foot facility in Chatsworth. The company is doubling its space in the move from its previous headquarters in Culver City. M & K; will employ about 90 people at its new site at 9351 Deering Ave. in the Northpark Industrial Center. Scott Caswell, a broker with Delphi Business Properties, represented the tenant and the property owner, Gary Siegel. MetLife Moves Metropolitan Life Insurance Co. consolidated two offices at a new Westlake Village location. The company leased 6,500 square feet at Westlake Plaza Center III in a five-year lease valued in excess of $1 million, sources said. MetLife, which is moving its Oxnard and Thousand Oaks offices to the new locations, will relocate to 2815 Townsgate Road. Tom Festa, a broker with Grubb & Ellis, represented MetLife in the transaction. Tony Principe, a broker with Westcord Commercial Real Estate Services, represented the landlord, Plaza Center III LLC. Staff reporter Shelly Garcia can be reached at (818) 676-1750 ext. 14 or by e-mail at [email protected].