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Tuesday, Nov 28, 2023

Long Wait Seen For Any Pickup In Pace of Deals – Valley Commercial Real Estate Scene

Long Wait Seen For Any Pickup In Pace of Deals Valley Commercial Real Estate Scene By SHELLY GARCIA Senior Reporter With vacancy rates climbing and corporate malaise lingering, real estate developers and landlords are digging in for a long year ahead. Landlords are refraining from increasing rents on lease renewals and coming to the negotiating table with concessions that have not been seen in the industry for a number of years. Developers are putting plans to build on a speculative basis on the back burner, or waiting until at least some tenants sign on before moving forward. To be sure, activity has picked up in recent weeks brokers report a number of firms have initiated discussions on future plans but most agree it will likely be months before those talks give way to more serious pursuits. “A lot of corporate decisions now are to sit tight in terms of relocating or expanding,” said Kevin Read, vice president at Lennar Partners, which is redeveloping LNR Warner Center. “For some people, they’d rather focus on their business rather than relocating space, which is a relatively major disruption.” A lot of tenants are waiting until the second half of the year, when they think it will be easier to gauge how long the current recession will last, before making commitments to new offices. Those that are renewing leases are finding there are some bargains to be had. But what no one is finding is the rock-bottom, fire-sale mentality that prevailed in the last recession. With interest rates in the 6-percent range, many building owners can afford to ride out the slowdown. Their vacancy rates may be rising, but they have been able to refinance and reduce their costs significantly as well. That has kept a cap on tenant lease negotiations and the asking prices for properties that are put on the market. “They’re not motivated sellers,” said Rickey Gelb, general partner with Gelb Enterprises, which owns a number of smaller buildings in the San Fernando Valley. “Even though they have vacancies, the bottom line is probably as good or better than it’s ever been.” That’s not to say that landlords are hoping to ride out the recession without making some compromises. Many began to offer concessions in the fourth quarter of last year everything from free rent for the first six months of the lease to free or discounted parking and a range of tenant improvements. Owners of smaller buildings are offering shorter leases, and those with larger complexes are writing in provisions that would extend the customary annual rent increases by six months or even an additional year instead of the 5-percent to 10-percent annual increases that were typical in years past. “We have not lowered rents, but we did not raise our rates as we have been doing,” said Eric Hasserjian, first vice president for Arden Realty’s Los Angeles North region. In other cases, as leases come up for renewal, landlords are adjusting rates downward to more closely align with the marketplace. Many of the leases signed five years ago as the market began its upswing provided for increases based on the assumption that rates would continue to rise. In some cases, the leases called for increases late in the term that now exceed market rents. Modern Videofilm Inc., which just renewed its lease at 4411 Olive Ave. in Burbank, is a case in point. Because of increases built into its last lease, the company is now paying rates that are higher than what it would be able to get on the open market. So Mark Sullivan, executive vice president at Julien J. Studley Inc. who represented Modern Videofilm, negotiated a new rate that takes the current market into account. “The rent they are paying going forward is probably 15 percent to 20 percent less than what they will be paying in the last month of their term,” Sullivan said. “The marketplace is less expensive than what people predicted when this lease was signed, and I think there’s an opportunity for tenants to look at leases where they’re paying rents greater than market and immediately reduce their occupancy cost.” Sullivan said he is working with clients who are still two years or more away from the end of their lease term to take advantage of the current market. He believes the strategy can help landlords as well by allowing them to ensure a continual cash flow. Such tactics may not be as effective with other landlords. Higher vacancy rates may mean these properties are generating less income, but the debt costs of operating the buildings have come down as well. Those who stand pat now believe they will find an ample market of tenants and opportunities to sell at even higher prices should they desire when the market improves. The same thinking has led to a dearth of properties for sale on the market. “We made three offers in the last six months,” said Gelb. “And so far, we haven’t been able to get them at a fair price. We’re about 8 percent to 10 percent away on the price they’ll sell for.” Conventional wisdom would suggest that developers use the down market to purchase new properties for renovation or land for building, but those in the market for such properties are not finding any bargains. “There’s a great disconnect right now between what buyers want to buy properties at and what sellers want to sell them at,” Read said. “With interest rates so low, it’s a better business decision to go out and refinance your property rather than sell.” Interest rates have also helped developers of new properties, who point out that the cost to carry these empty buildings has declined by as much as six or seven percentage points from the 10-percent or 11-percent rates that prevailed in the last recession. But an empty building is still an empty building, and there are few takers for the higher rents these new developments are charging. “Compared with a year ago, there are maybe 20 percent of the lookers out there,” said Gerald L. Katell, president of Katell Properties who just completed a 67,000-square-foot office building in Agoura Hills. “I expected this building to be 25-percent leased upon completion. I expected to have tenants in when we opened. So it’s not where I wanted it to be.” Potential tenants for the space, with asking rates of $2.25 per square foot to $2.30 per square foot, are so scant that brokers are calling Katell about potential tenants with even the smallest space requirements. With a dearth of prospects for new space, those developers who had planned to begin new speculative projects have put those plans on the back burner, preferring to wait for signed deals before they move forward. Lennar had planned to build the first and part of the second phases of its LNR Warner Center project on spec, although the company ended up pre-leasing most of the buildings anyway. But that was last year. Now Lennar has no plans to rush into the third phase until it has secured at least some tenants. “We’ll be submitting plans for the plan check to have something ready to go,” Read said, “but certainly we wouldn’t go up on a 100-percent speculative basis, we’ll need some pre-leasing. At least that’s today’s plan.”

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