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Thursday, Mar 28, 2024

SPACE–Small Tenants Take Up Lots Of Space in New Projects

For more than a year, as the economy improved and the real estate market tightened, brokers bemoaned the lack of large, contiguous blocks of space to show potential office tenants. But now that several new facilities have opened with the capacity to house tenants of 50,000 square feet and more, they are filling with a number of small tenants that need less than 15,000 square feet. To be sure, San Fernando Valley developments like Glendale Plaza and the West Hills Corporate Village have snared a fair share of giants, but these buildings are also leasing to smaller office users, for whom the availability of large blocks of space doesn’t matter. What gives? “I think, really, L.A. is a city made up of small and medium-sized companies,” said Larry Kosmont, president of real estate consulting firm Kosmont & Associates. “You always look for a big tenant, but everyone knows those tenants are few and far between. The building is going to be filled up with small tenants because, guess what, our economy is filled with small tenants.” According to a report recently compiled by the Economic Alliance of the San Fernando Valley, 4,398 of the 63,810 firms housed in the San Fernando Valley have annual revenues of $10 million or more. At the same time, developers, even those with the most attractive properties, are first and foremost interested in renting their buildings no matter the size of the tenant. And larger tenants take longer to make leasing decisions. “The larger tenants are out there, they just haven’t landed yet,” said Bill Inglis, a broker with CB Richard Ellis Inc., who points out that Baxter International and Health Net are both currently shopping for space as large as 300,000 square feet. Small companies can often make a decision about a lease within weeks because the process only involves one or two principals. Large companies, on the other hand, must consider a wide variety of factors from location of the workforce to the company’s long-term growth strategy and these issues have to wind their way through a long chain of command. “These types of deals take a while to close,” said Mark Leonard, a principal with Trammell Crow Co., which is currently developing three properties in the Valley. “These tenants go into the marketplace well in advance of their needs and there aren’t as many large as small, but they are still taking place.” Some of the recently signed office leases in the Valley include the 135,000-square-foot deal made by State Compensation Insurance Fund at Glendale Plaza and Boeing Co.’s 170,000-square-foot lease at West Hills Corporate Village. Still, it is the small companies that are likely to represent the lion’s share of the market, both now and in the future. “For every one big block of space, you’re going to have double that square footage of small tenants,” said Rick Pearson, a broker with Cresa Partners. “The reason is that, for all the big companies, there’s a ton of little companies that have to support them.” In the long run, developers, even those with large buildings, are not likely to feel pinched by the preponderance of smaller tenants. For one thing, a building filled with a lot of smaller tenants is not as vulnerable if one tenant leaves as one with just a few large tenants. There is also a cost advantage to leasing smaller spaces. “It doesn’t really matter that much,” said Jerry Katell, president of Katell Properties. “Tenant improvements cost roughly the same amount per square foot, and certainly from a negotiating standpoint, the bigger tenants have more strength.”

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