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Tuesday, Nov 28, 2023

Owners Antsy To Fill Space Lower Rates

Owners Antsy To Fill Space Lower Rates By SHELLY GARCIA Senior Reporter The mood has turned from “let’s bide our time” to “let’s make a deal” in the West San Fernando Valley office real estate market as demand remains weak and vacancies high. Many landlords, anxious to keep existing tenants from bolting and corral the few new companies shopping for office space, have loosened their grip on asking rental rates. While there has been some erosion in rents in a number of Valley submarkets, the West Valley, and particularly Woodland Hills and Warner Center, has seen some of the most aggressive rent reductions, brokers say. Concerned that a turnaround in the office leasing sector may not come until 2003, landlords in the area have dropped asking rates anywhere from a few pennies to 15 percent, depending on the building. “From a landlord’s perspective, they want to get their buildings leased,” said Brian Forster, executive vice president and co-owner of TOLD Partners Inc. “They’re just filling space now at whatever rates they can and whatever terms they can.” According to data from Grubb & Ellis, average asking rates in the West San Fernando Valley dropped to $2.32 per square foot in the second quarter of 2002, down from $2.38 per square foot in the comparable period in 2001, a far steeper decline than many other Valley submarkets. But the data may be lagging reality. With vacancy rates in the West Valley pushing 16 percent, brokers say rates on new leases are averaging $2.00 to $2.20 a square foot, compared to $2.15 to $2.45 a square foot earlier in the year. “People who own buildings are going, ‘The world is coming to an end,'” said Bill Inglis, senior vice president at CB Richard Ellis, who handles leasing at Warner Center Properties. “And if you have a big-name tenant, you’re going to go through hell and high water. You’re not going to lose him. Is it worth 10 percent? It may be.” Landlords began offering some concessions, typically for tenant improvements or parking, last year as vacancy rates began to inch up. But, believing that the downturn was temporary, they stood their ground on asking rents. After all, prospective tenants were continuing to shop for space, some deals were getting done and lower interest rates were compensating for the income lost as a result of higher vacancies. But vacancy rates in the West Valley have been climbing steadily, up from around 13 percent in the middle of last year. In contrast, rates in the Central Valley, the other large business center on the Valley floor, which includes Sherman Oaks and Encino, have been hovering in the 12-percent range since the beginning of the year. Rising vacancies are only part of the problem. Brokers are reporting that the pool of prospective tenants out shopping for space in the market has all but dried up. Douglas, Emmett Co. will soon close on its purchase of the Warner Center Properties high rise buildings. The current owners have not taken an aggressive stance in the current market because of the pending sale, but the acquisition signals a likely onslaught of marketing activity to fill hundreds of thousands of vacant square feet in those buildings. Add to that a gaggle of prognosticators pushing the economic recovery timetable back to some time next year, assuming, that is, that the double-dip recession some have foreseen does not materialize, and the pressure is on. “There’s more supply, there’s sublease space, there’s more defaults, there’s new product, so a combination of all those things creates downward pressure to compete,” said Eric Hasserjian, first vice president for Arden Realty’s North Los Angeles region. “Obviously, we don’t create the market, but it’s our job to know where the market is going and to go out and be proactive.” Arden, which owns two Woodland Hills office properties, has dropped its rents between 5 percent and 10 percent over the past year and a half, said Hasserjian. Woodland Hills Financial Center, with 225,000 square feet at 21021 and 21031 Ventura Blvd., is now leasing at $2.10 to $2.15 per square foot. Clarendon Crest, a smaller property off Topanga Canyon Boulevard, is leasing at an average of $1.75 per square foot, down from $1.85 per square foot. Landlords are stepping up the timetable for lease renewals, hoping to lock in the tenants they do have. In some cases, renewal deals are being cut at rates lower than the tenant’s current lease, and landlords are showing a willingness to offer two-and three-year leases to what one broker described as “commitment-phobic tenants,” unwilling to make long-term deals in an uncertain economy. While most landlords have been able to retain their existing tenants with these types of concessions, filling empty space remains the bigger problem. There are so few companies out shopping for space that landlords are left vying for the same scant tenants, and price is often the only bargaining chip. “There comes a point where it’s not a matter of adjusting the rental rate, it’s a matter of having viable tenants to absorb the space,” said Bob Safai, a broker with Madison Partners. “They reduce their rents to see whatever deals are out there, to plug up the dyke and weather the storm, and it’s working.” Carlton Plaza, a 151,349-square-foot office building in Woodland Hills is a case in point. Safai, along with Madison’s Lynwood Fields, brokered the sale of the building recently to Crown Realty & Development. Crown paid $21.3 million for the building, based on the occupancy rate at the time, about 80 percent. By the time the deal closed, asking rents had been reduced to the low $2.00 range from $2.45 per square foot, a move that helped to fill another 20,000 square feet. The competition for new tenants is so fierce, landlords have begun to drop rents on a case-by-case basis. Brokers say they’ll bypass a property because the listed rates are not within their client’s range, only to have the owner’s broker offer up a new rate. “When there’s a deal everyone is chasing the same tenant,” said Forster. “You see unsolicited offers all the time.”

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