New industrial development in the San Fernando Valley, once viewed as a sure bet, is turning out to be a much harder sell. Several of the companies that leased large portions of some of these new complexes have cut back or left the market altogether, leaving in their wake a condition previously unheard of in the region: industrial sublet space. Other facilities are taking longer to lease than anyone would have expected just a few years ago when developers began building the current inventory of upscale properties. “The cracks are in trophy buildings,” said Scott Caswell, a broker with Delphi Business Properties, which specializes in industrial real estate. “(Companies) are saying, ‘we’re not going to spend 90 cents a square foot, we’re going to spend 75 cents.” Consider these developments: – Enson Inc., a startup children’s wear marketer that had leased just over 108,000 square feet at the Airport Business Park, has pulled out of its lease deal. – Pharmavite Corp., which had planned a full-scale relocation of its corporate headquarters and manufacturing facilities to Valencia, is expected to scale back its plans to lease about 740,000 square feet in Vista Business Park in Valencia. – Nortel Networks is closing its facility in Tapo Canyon Business Park in Simi Valley, putting that space up for sublet. The chinks emerging represent only a small portion of the industrial real estate market in the Valley. Vacancy rates in the sector remain in the exceedingly low, 5-percent range. And some deals are continuing to get done. Indeed, a startup optical components firm, Quintessence Photonics Corp. has just leased 40,320 square feet in the Valley Gateway Business Park, a World Oil Corp. development completed last summer in Sylmar, according to Barbara Emmons, a broker with CB Richard Ellis Inc., who handled the transaction for the landlord along with Chris Sullivan at Daum Commercial Real Estate Services. But the apparent slowdown in the sector is nonetheless disconcerting to brokers and developers. A year ago, no one would have guessed that building a new industrial park in the San Fernando Valley was anything less than a swift license to print money. “When the GM plant was built, that went like hot cakes, and everyone was going, ‘gosh, this is great. Let’s build bigger buildings so we can do the same thing,'” said Emmons. “Then the next wave of properties was slower.” In 1998, when Voit Cos. and Selleck Development Group Inc. built Van Nuys Center at The Plant in Panorama City, demand was so strong that the 30-acre industrial portion of the development filled to capacity almost immediately. The companies snapping up 100,000- and 200,000-square-foot spaces in the blink of an eye sent a clear message to other developers, and many rushed to duplicate the successes they saw. Since then, Royal Clark Development Co. built the Cascades Business Park, a 66-acre industrial complex and golf course in Sylmar, and World built the Valley Gateway Business Park with about 170,000 square feet of industrial space, also in Sylmar. The Lewis Co. constructed about 450,000 square feet of industrial space in Van Nuys. And Trammell Crow Co., along with AMB Property Co., grabbed up the former Marquardt Co. site, beginning a project that all-tolled will either remodel or build about 680,000 square feet of industrial space. Some of the properties are still looking for tenants. Valley Gateway has 108,000 square feet remaining. And the Cascades has yet to lease any of about 360,000 square feet in a phase that will be completed this summer. Some brokers downplay the situation. “A lot of time until the walls are up, tenants can’t visualize it,” said Greg Geraci, vice president at CB Richard Ellis Inc., in defense of the lack of leasing activity at Cascades Business Park, which he is marketing. “We’re close on a deal on the 60,000-square-foot (building) and we’ve got activity on the other two buildings.” But others concede that the market has changed, and not for the better. “I had the space listed for three or four months for sublease to try to get my client out from underneath it,” said David Kimball, managing director at Julien J. Studley Inc., referring to an attempt to sublease the Enson space at Airport Business Park. “We had some people take a look at it, but right now it seems like everyone’s taken a step back and decisions aren’t being made as quickly as they were last year.” One issue is price. In their effort to capture some of the new economy companies expanding, developers built more expensive amenities into their projects, features that, in general, increased rents from an average of about 55 cents per square foot in older properties, to about 75 cents per square foot in the newer buildings. But perhaps more important are the volatile conditions at many of these companies. Enson simply failed to launch when the e-commerce economy turned sour. Pharmavite, caught in a downturn in the supplement market, determined that its plans to upgrade its manufacturing operation were too costly, according to sources. (Pharmavite officials were not available at press time.) And Nortel, caught in the tech wreck, has been forced to downsize. Even those companies that have not experienced any dramatic business changes have been forced to turn their attention to managing the store, putting relative luxuries like the search for new real estate on the back burner. “They’re focusing on the bottom line and making sure they’re selling their products,” said Kimball. “They don’t want to spend their time on real estate transactions. They want to spend their time on making sure their businesses are running properly.”
