Office/garcia/33″/dt1st/mike2nd By SHELLY GARCIA Staff Reporter Last year at this time, brokers and property managers looked out over the horizon of business parks in the West San Fernando Valley and thought that the sky was the limit. With the economy expanding and vacancy rates at an all-time low, rents had already started to climb, and many were projecting rent increases in excess of 15 percent through the end of 1999. But that optimism is waning fast. A number of new office projects due to come on line beginning next year, coupled with several major corporate relocations planned during 2000, will dump more than 1 million square feet of office space on the West Valley market by the end of next year that’s three times the amount of space absorbed last year, and double the rate of absorption in 1997. Because the space opening up will not be available all at once, some brokers and developers say they see little cause for concern. But others point out that with so much space coming on line, the once-heady predictions for the market now seem greatly exaggerated. From today’s vantage point, real estate executives say it looks like office space will remain on the market longer, and there’s little likelihood that lease rates will rise above current levels. “I don’t think the market is going to get awash in space, but it’s not going to be a landlord’s market,” said Jerry Katell, president of Katell Properties, which recently scrapped a plan to build an office complex in the Warner Center area. “It’s going to be hard to get those $2.50 and $2.75 (monthly per square foot) rents.” Among the developments underway: ? Regent Properties is in discussions with tenants interested in leasing the remaining 190,000 square feet of space in the recently completed West Hills Corporate Village. ? Tishman International Cos. is slated to complete construction by the end of 1999 on 20th Century Plaza, a 273,000-square-foot high-rise in Warner Center that will house 20th Century Insurance Co. and include about 100,000 square feet of space for other tenants. ? Trammell Crow Co. is redeveloping 380,000 square feet of space at Corporate Pointe at West Hills with a completion date in the fourth quarter of 1999. ? Lennar Partners expects to complete the first phase of its LNR Warner Center complex, including 355,000 square feet of space, by the fourth quarter of 2000. In addition to this wave of space coming on the market, another factor that threatens to soften the West Valley market is that several large Warner Center tenants are either relocating or reducing the amount of square footage they occupy. State Compensation Insurance Fund plans to vacate 100,000 square feet of space in a move to Burbank. Cigna Corp. will give up about 30,000 square feet in a consolidation of its current quarters. Sterling Software will relinquish 46,000 square feet when it relocates to a 135,000-square-foot facility in West Hills Corporate Village. The new space is rolling out after years of decreasing availability and increasing demand. For nearly seven years, there had been virtually no new development in the West San Fernando Valley. Last year, West Hills Corporate Village came onto the marketplace, driving the office vacancy rate up to a current 14.3 percent. Before that project arrived, office buildings in the area had been running at vacancy rates below 10 percent, brokers said. With so tight a market, those seeking blocks of space of 25,000 square feet or more had few options, and monthly rents climbed from an average of $1.85 per square foot a year ago to as much as $2.25 currently for some class-A buildings in Warner Center. But beginning in the first quarter of this year, brokers and landlords began to see resistance to the higher rents, and leasing activity began to slow considerably. At the same time, developers began stepping up activity on new construction, changing the outlook for the next year. “My opinion is, (office rents) will go up a little, but I think we’ve about reached where it’s going to be,” said Bill Inglis, vice president with CB Richard Ellis Inc. “The reason is because of this specter of space coming on line. That will keep the (rental) rates in line through the first half of 2000.” A number of brokers and developers argue that the development underway represents a broad cross-section of the market, and is not all directly competitive. The West Hills projects, for example, are considered class-B projects because they are not centrally located to freeways and the area does not have the same amenities, such as restaurants, as are available in Warner Center. They reason that with different types of properties becoming available at relatively staggered times, the new development will drive up interest in the area rather than create a glut of space competing for tenants. “I think it’s actually good for the market to have different kinds of space because we’ll be able to attract different tenants into the market rather than everyone having class-A space at higher rates,” said Kevin Read, vice president of acquisitions for Lennar Partners. Tishman International is proceeding with its plans to charge $2.50 to $2.60 a month, per square foot, for its upcoming high-rise. Tishman officials believe that the amenities of their brand new, state-of-the-art building, along with the services and labor pool available in the immediate area, will lure tenants. “When you price something and you’re leading the market, you don’t want to be arrogant,” said Alan D. Levy, Tishman chairman. “But on the other hand, we know the rent we achieved with 20th Century, and they’re no fools. We think that’s the market.” But recent events have shown that tenants may perceive less difference between the various properties than do the landlords. Sterling Software decided to relocate from Warner Center to cheaper digs in West Hills, where the rents are running at well under $2 per square foot and parking is free. Sterling officials declined to comment on the move, but others point out that despite the strong economy, tenants have become more vigilant than ever about keeping costs under control. That, as much as anything, is dictating their leasing decisions. “The tenants in Warner Center, like Sterling, are making it clear they’re not $2.25 tenants, who are willing to pay for parking on top of that,” said Carl Muhlstein, senior vice president at Cushman Realty Corp. The lower rental rates available at the West Hills developments have helped Regent Properties to get tenants signed to leases for 400,000 of the 590,000 square feet of space available in its recently completed Corporate Village. Until the major Warner Center projects are complete, the just-completed Regent project and soon-to-be-completed Trammell Crow project are the only game in town for users who need 20,000 square feet of contiguous space or more. With that space being available so much sooner and more affordable than the new Warner Center projects, it may be tough for the Warner Center projects to attract tenants, even if they’re targeting higher-quality tenants. “Whether there’s competition from a directly competitive product type or not, competition just forces market efficiency, and that’s what we’re going to see,” said Mark T. Sullivan, senior managing director for Julien J. Studley Inc. Officials at Trammell Crow, which is renovating Corporate Pointe on a speculative basis, said they are getting inquiries from Warner Center tenants, although no deals have yet been completed, according to Mark Leonard, a principal with the firm. “I think we are an alternative, both from a physical standpoint and parking,” he said. “But also, from a price point, we are less expensive than the high-rise environment of Warner Center.” Even at Warner Center, where the vacancy rates are so low that the largest block of space available is a mere 12,000 square feet, there’s an increasing awareness that rents may have gone as high as possible for now. “We feel we’ve pushed rates as far as we can,” said Donald W. Hudson Jr., senior vice president and director of leasing for Warner Center Properties, a manager of major buildings in the area. “We need to solidify more deals before we can arbitrarily move onto a higher rate structure.” Some say the expectation that rents would rise to $2.50 and more in Warner Center were unrealistic to begin with. Not only is Warner Center competing with West Hills, it is also competing with places like Valencia and the Conejo Valley, where rents are lower. And unlike some of the prime office markets on the Westside of Los Angeles, there is still room for additional development in the San Fernando Valley. It was the changing rent situation that prompted Katell Properties to scrap its plan to develop an office complex on its Warner Ridge property. “That’s the kind of rent we would have had to achieve on Warner Ridge, and that’s one of the reasons we’re going residential,” said Katell of the $2.50 ballpark. “I think there’s a resistance to the higher rents you have to achieve. Personally, I think it would have worked (as an office project.) But in order for me to put that project together on a spec basis, I would have had to give a great deal of (rent and tenant improvement concessions), and in order to do the project on a residential basis, I won’t have to give any (such concessions).”