They’ve been called big monsters or just big blocks of space. They are also, simply put, a drag. As large corporations have downsized, closed shop or moved away during the Great Recession and the slow recovery, they have left large swaths of empty office space in their wake. The colossal empty floors dotting the Valley have spooked investors and raised questions whether these offices need to be carved up or redesigned before a tenant can, finally, be found, brokers say. Many of the behemoths were built for another time — a time when large corporations were growing and before businesses increasingly employed technology and open floor plans to trim their square footage. “A lot of the space will need to be redesigned,” said broker Cathy Scullin, a senior vice president with NAI Capital Inc. “There aren’t very many 25,000 square-foot tenants running around.” Scullin said the large blocks have put further downward pressure on all rents, aggravating a situation already made tough enough by the high vacancy rate among smaller units. In the greater Valley region, the vacancy rate for large spaces totaling 25,000 square feet and higher stands at 44 percent, Scullin said, citing CoStar Group data. That’s compared to the 22 percent vacancy rate for smaller blocks under 25,000 square feet — still abysmal. Brokers located in areas with the large, empty blocks are quick to point out the oversized effect on the vacancy rate, adding that for smaller transactions the market is better and improving. Ryan House, a vice president with Jones Lang LaSalle in the Santa Clarita Valley, points to three mega vacancies — including the old U.S. Borax building. The borate supplier closed its Valencia headquarters in 2007—prior to the recession—when it left for Denver after it was rolled into Rio Tinto Minerals. “People have the perception the market is weaker than what the numbers show,” House said. “I mean we had positive absorption.” House, who stopped representing the building’s owner this spring, said it was difficult to find tenants or an owner for the building, because there have been few large companies needing such space. Despite the heavy glut, the office market appears to have reached, or at least is nearing, a bottom, brokers say. At the end of the third quarter, the greater Valley area’s office vacancy rate stood at 17.5 percent, a slight drop from the previous quarter and down from 18.6 percent in the same period last year, according to Jones Lang LaSalle, which does not include subleases in its calculations. The office market in the greater Valley absorbed 70,477 square feet of space in the third quarter, according to Jones Lang LaSalle. And although that’s a blip in a nearly 42 million-square-foot market, it’s at least positive. Few to blame for high vacancy rate Still, it’s going to be “a long road of small leases in order to realize normalcy” until the large blocks are leased or bought, Daum Commercial Real Estate Services wrote in a second quarter Conejo Valley office market summary. “When you talk about the vacancy factor (in the Conejo Valley), that is coming from about 10 projects,” said Mike Foxworthy, an executive vice president with Daum Commercial, who said the number of leases signed for smaller units is increasing. But those big blocks are causing investors to skip over the Conejo Valley, he said. “From an investor or a financing perspective it causes issues,” he said. “When they see a high vacancy factor sometimes they disregard the market entirely. They need to dive into what is the causing factor.” But the large blocks aren’t driving rents down on the smaller properties, Foxworthy said. A glut of smaller vacant properties and not enough tenants is doing a fine job of that, he said. One recession-induced downsizing came courtesy of Move Inc. The online real estate website operator shrunk its office in Westlake Village in 2009 to trim costs, which it estimated would save $1 million a year. According to a filing with the U.S. Securities and Exchange Commission, the business shaved its square footage by about 62,000. And of course those cost savings, while benefiting Move, were less than ideal for the market. Three years later, about 59,000 square feet remains vacant, according to the landlord’s website. Arden Realty Inc. did not respond to a request for comment. But there is still some movement in larger office leases. In September, Guitar Center signed a lease on two large suites totaling 42,673 square feet at 112 S. Lakeview Canyon Road in Westlake Village. The office space became available when both Verizon and General Dynamics downsized within the building about 18 months and 6 months ago, respectively, said Lee Black, an executive vice president with NAI Capital, who represented the landlord. To give prospective tenants a better vision of how one suite could be used, Black said the landlord knocked down several interior walls, creating a more open floor plan. “It is kind of hard to envision, when looking through the drywalls,” Black said. The deal, compared with other large blocks, happened relatively quickly. “I think it’s just timing, and finding the right size user,” he said, adding the building’s green certification helped it lease quickly. Carving up large space for lease Greater demand for smaller units prompted plans to divide two large 25,000-square-foot floors at Calabasas Park Centre, said real estate agent Marc Spellman. One floor was carved into seven units ranging from 2,000 to 7,000 square feet and is now fully leased, he said. Another floor will soon be broken up. “We have had a lot of success doing that,” said Spellman, principal with Lee & Associates-LA North/Ventura Inc., declining to name specifics of the leases. Finding tenants for the big blocks, Spellman said will likely come through such redevelopment because there is more demand for smaller spaces than large floor plans. When larger tenants didn’t arrive at the Scheu Development Company’s three-story 64,000-square-foot office building in Simi Valley, the developer and property manager decided to break it up. Come November, Scheu Development expects to open 38 executive suites on the second floor of its Simi Valley Corporate Point, which will come fully furnished and decked out with access to receptionists, video conferencing, a lobby and more. The building, as of mid-October, was only about 55 percent leased, and the company hopes the suites will help fill it to capacity. “What everyone coming here wanted was smaller office space,” co-owner Dianna Scheu said. And the space Scheu was leasing out previously wasn’t even that large — from about 1,200 up to 10,000 square feet, she said. Since announcing the executive suites, businesses have been flooding the firm with requests, Scheu said. “All you have to do is sit down, plug in and go,” Scheu said. Landlords have several options to increase the viability of their large open floors, including dividing them up, making the building more energy efficient or reusing the building for apartments and other uses, said senior vice president Dean Schwanke of the Urban Land Institute. “You could add these new dimensions to help make it more attractive (but) … the ultimate problem is job growth,” Schwanke said. But if landlords decide to carve up their large vacant floors it likely will be neither quick, nor easy. Landlords, who are taking in less as rent continues to decline and space sits empty, have a hard time paying for improvements, Scullin of NAI Capital said. “Cash is tight because the income is tight,” she said, adding she doesn’t know how long it will take to find firms big enough to fill the giant spaces or for landlords to divide the blocks up. While some “creativity” or adaptive reuse may need to be employed by landlords to fill the large spaces, the cost to divide the floors is daunting and redesigns often create undesirable windowless offices, Foxworthy said. What’s truly needed, he and others said, is for jobs — specifically from large corporations — to start flowing into the Valley.
Big Blocks of Space Dragging Down Office Market
