In years past, declining office vacancy rates would signal renewed development activity. But now, just as office tenants begin to think about expansion, there’s nary a shovel to be found digging up a new office building anywhere in the greater San Fernando Valley. After several years when most available parcels were snatched up to meet the demand for housing, the Valley is running out of room for new office space development. The lack of available land was in part responsible for persuading eight bidders to throw their hats into the ring for a Burbank parcel that will accommodate 850,000 square feet of new offices when NBC Universal put the lot up for sale, and it likely helped to drive the price up to an estimated $55 million. But the development, and even the few others that are planned throughout the Valley, are not nearly enough to accommodate future needs. “There are fewer opportunities for developers. If it’s not the lack of supply, it’s the current zoning that is locked in. said David G. Mgrublian, co-CEO and managing director at Investment Development Services. “There are fewer opportunities for tenants. I just think that when they’re looking for space, there will be fewer opportunities.” Zoning regulations now prohibit the construction of high rise buildings along the Valley’s main commercial corridor, Ventura Boulevard, where a large portion of the high-rise office stock is located. Much of the underutilized or available land in Warner Center, another Valley office hub, has been snapped up by multi-family housing developers. And no-growth and slow-growth ordinances in Conejo Valley communities have pretty much shut down development opportunities there. “The quintessential question is how tolerant will Los Angeles be in terms of upgrading its zoning codes,” said Larry Kosmont, president and CEO of Kosmont Cos., a real estate and development services firm in Encino. “Unless developers go to a higher density equation, then we will stay in a build-out scenario, and generally, the equation for whether or not you go to higher density is traffic. What ends up happening is a city’s ability to ‘densify’ becomes reliant on mass transit, and I don’t see any meaningful public transit servicing Woodland Hills in your lifetime or mine. If that doesn’t occur, development for large corporations goes elsewhere.” The dwindling office supply went largely unnoticed over the past several years as the economy faltered, office vacancy rates ballooned and companies showed little taste for expansion. Developers turned their attention to housing or retail projects. But as of the second quarter of 2005, office vacancy rates in the greater Valley dropped to an average of 7.8 percent, with some submarkets at levels of 5 percent of less, compared with an overall vacancy level of 10 percent just as the economy started to recover a year earlier, according to statistics compiled by Grubb & Ellis. Conventional real estate wisdom would dictate that the current vacancy levels would spur a building boom of sorts. But a mere 280,452-square-feet of office space is currently under development, the Grubb & Ellis data shows just 1 percent of the total office space in the region and the vast majority of that space is in the Santa Clarita Valley market. Few large parcels Worse yet, there are but a few large, vacant parcels of land in existence where developers can construct additional facilities. “There’s so little product coming down the pike as under construction, planned or just hitting the planning stages, and we’re already at a 7.8 percent vacancy,” said Jim Lindvall, a broker with Grubb & Ellis. “You’ll have some deliveries, but as you look at the entirety of the Valley, that’s a blip on the radar screen. In the long haul, I just don’t see enough product.” Only a handful of new office developments is anticipated. LNR Property Corp. expects to break ground early next year on the final phase of LNR Warner Center, adding about 500,000 square feet of office space. IDS is working on a parcel in Westlake Village, and there are some scattered sites elsewhere in addition to the Burbank parcel. But put together, these sites are not nearly enough to satisfy demand as the economy expands. The coming shortage is not lost on investors like Arden Realty Inc., which has acquired three Valley properties in the past year. “We just did a purchase in Agoura, and we really like that Conejo corridor,” said Howard Stern, senior vice president and chief investment officer at Arden. “There is not a lot of land left out there.” Brokers have been scratching their heads as they see occupancy rates increase without much of a corresponding rise in asking rents, now averaging about $2.13 a square foot for all office property types, up just a few cents from the year ago period. But that, say most, is about to change. “In the cycles I’ve been through, as vacancy starts to drop, meaning net absorption is increasing, the concessions disappear first,” said Rick Kern, regional president for LNR Property Corp. “So the free rent and free parking has been waning. Now the next step is for rent to start pushing up.” Brokers are estimating that, based upon the purchase price for the NBC Universal site, rents on the property developed there will come in at least at $3.25 a square foot. That is going to push rents for all other office properties upward, but only if a suitable space can be found. The real question is how will the Valley accommodate its current office tenants as they grow and expand? Cyclical market Some say this situation is just the latest in a cyclical real estate market that has continually adapted to changing needs and dynamics. They see a time when infill redevelopment will create new office space in the same way that it is now creating new housing old buildings will be torn down and refurbished, outdated retail centers or industrial buildings will be transformed. But others predict there will be a movement of companies to outlying areas Santa Clarita, Simi Valley, Oxnard and other regions which are quickly reaching population levels that will satisfy employers’ workforce needs not unlike what began to happen about 10 years ago when industrial properties on the Valley floor reached saturation and businesses made a beeline for Valencia. “In the last few years, almost all of the property that could be developed changed to residential use,” said Tom Bohlinger, senior vice president at CB Richard Ellis, who was one of the brokers who marketed the NBC Universal property. “So most developers are saying, we are going to have an availability crisis.”
