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Friday, May 17, 2024

Subleasing Still Riding High in Valley

Office sector struggles; industrial stays strong.

San Fernando Valley office space continues to see the impact of the pandemic, when masking and distancing restrictions and other complications sent workforces home and devalued the necessity to commute for work. 

“Availability is still high,” said Mike Soto, research director at Savills. “Leasing activity is still lower than pre-pandemic.”

According to Colliers data, unoccupied office space appears incredibly high as the San Fernando Valley overall saw net absorption at —140,538 square feet. The Tri-Cities communities of Glendale and Burbank had a combined net absorption of -90,673, the bulk of which was Glendale’s loss of 65,668 square feet. Burbank saw only 691 square feet of abandoned office space.

“Sublease space is still high,” Soto said. “A quarter of Los Angeles office space is up for lease.”

A large amount of sublease space — Farmers Insurance’s over 580,000 square feet — put on the market in Woodland Hills caused the sublease availability rate in West San Fernando Valley to hit to 9.2%. This caused the whole San Fernando Valley and Ventura office market sublease availability to jump 160 basis points from 4% to 5.6%.

Vincent Chang, a researcher at Colliers, noted that nearly 40% of the San Fernando Valley and Ventura County total of leasing occurred in Central San Fernando Valley, where office demand is highest, particularly in Encino and Sherman Oaks.

Leasing in San Fernando Valley and Ventura in the first quarter — totaling 670,252 square feet — made up 19.2% of the Los Angeles total. By comparison, leasing in San Fernando Valley and Ventura made up 15.4% of the Los Angeles total in the entire year of 2021.

Leasing activity in Q1 of 670,252 square feet Valleywide is close to the pre-pandemic quarterly average in 2019 of 687,973 square feet.

“All of the submarkets in San Fernando Valley have increased in weighted asking rents year over year,” Chang said. “That’s unique.”

Soto said that the number one theme of first quarter 2022 in the San Fernando Valley is how are we going to work moving forward.

“Most office occupiers are cautiously optimistic that the pandemic is over,” Soto said. “It’s still going to be a challenge getting people back in the office. Some companies want everyone back in the office. The other want everyone is remote. Most of them are in-between. The hybrid workplace is here to stay.”

Overall, the market is much better than it was a year ago when there was still uncertainty about the virus. 

“Now there’s a light at the end of the tunnel,” Soto said.

Industrial strength

Industrial continues to be the most reliable commercial real estate sector. Vacancy for the first quarter across the San Fernando Valley’s 90,106,215 square feet of inventory stands at .4%, which is lower than Los Angeles County’s .5%.

“The last quarter was incredibly strong,” said Mike Tingus of Lee & Associates L.A. North/Ventura, who sewed up several deals in the first quarter.

During the quarter, Tingus and Lee colleague Grant Fulkerson closed escrow on the sale of 5898 Condor Drive in Moorpark — a 130,000 square foot R&D building. 

“They purchased the building 3.5 years ago for $6.8 million and it sold for $20.3 million,” Tingus said.

Laritech, which creates circuit boards, has leased up 70,000 square feet at the address.

Tingus, Fulkerson and Joe Jusko represented the seller 2280 LLC, which sold the 242,101 square foot 2280 Ward Ave in Simi Valley for $46.7 million to Rexford Industrial Realty. Alare Technologies, which also creates circuit boards as well as commercial and military drones, leases the building.

The Lee team also transacted the sale of 323 Science Drive in Moorpark to the city of Moorpark, which plans to create a new city hall, council chambers and planning department on the site. The building sold in an off-market deal for $6.7 million. 

Simi Valley and Moorpark, with total inventory of 11,858,654 square feet, saw its vacancy in its first quarter at a tight .1% — its lowest in several quarters.

“Activity has been incredibly strong,” Tingus said. “It’s stronger than 2021 by far. We had a record quarter across the board. Industrial has been incredibly hot.”

Simi Valley and Moorpark currently has 405,356 under construction. The bulk of that is Stream Realty, which is creating the 345,000-square-foot Tapo Canyon Commerce Center. 

“That will help a lot when that becomes available later this year,” said Matt Nelson, senior research director at Colliers. 

Santa Clarita saw 390,128 in net absorption, reflecting all of the users occupying space in the first quarter at business parks such as The Center at Needham Ranch.

Tire’s Warehouse took up 170,000 square feet,” Nelson said. “L.A. North Studios took two properties for a total of 184,000 square feet and the rest are smaller. Those are the main drivers. They signed a lease while they were under construction.”

Nelson said that ecommerce and entertainment are the big drivers in Santa Clarita.

“(Amazon.com Inc.) took a huge plot of land in the Santa Clarita Valley,” he said. “L.A. North Studios have taken a few buildings in that market. Also, DrinkPak took 212,00 square feet and 188,000 square feet.”

The tight vacancy means a boost in rents. Weighted asking rents in Santa Clarita are up to $1.34 per square foot — nearly as much as the San Fernando Valley’s $1.44 per square foot average.

“There’s such a lack of options to expand so when these tenants come up for renewal, there’s a shock value,” Nelson said. “It’s increased more in the last five years.”

Hannah Madans Welk
Hannah Madans Welk
Hannah Madans Welk is a managing editor at the Los Angeles Business Journal and the San Fernando Valley Business Journal. She previously covered real estate for the Los Angeles Business Journal. She has done work with publications including The Orange County Register, The Real Deal and doityourself.com.

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