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Tuesday, Oct 3, 2023

Office, Industrial Diverge Further in Pandemic

 Office space and industrial properties followed opposite trajectories in the first quarter.As businesses reopen and the economy slowly rebounds from the coronavirus crisis, the office market remains sluggish while industrial continues to flex muscle.No major changes have occurred on both fronts as both sectors continue down their divergent paths established even before the pandemic.According to Colliers International statistics, office vacancy in the San Fernando Valley registered 16.7 percent in the quarter. Areas in the greater Valley region with the highest office vacancy include the East Valley at 21.7 percent, Glendale at 20.2 percent and the Conejo and Santa Clarita valleys each with 17.4 percent.Together, the markets in the Business Journal’s coverage area had a negative absorption of 433,102 square feet.Brokers working the office market remain cautiously optimistic with an eye toward the last two quarters of the year for better results.“It seems like there’s a light at the end of the tunnel but it’s not coming back until the end of the year,” said Santa Clarita-based office specialist Kevin Fenenbock of Colliers.NAI Capital’s Co-Chief Executive Chris Jackson in Encino agreed.“We’ll probably see a very strong 2021 with later quarters,” Jackson said.Office gloomWith the exception of the entertainment-fueled Burbank – which has improved its vacancy to 8.1 percent compared to 9.1 percent a year ago – office leasing activity is slow.

“It has been pretty stagnant overall the majority of the first quarter,” Fenenbock said.“It’s still pretty slow,” added Savills Southern California Research Director Michael Soto in reference to the office market. “Everyone is still trying to navigate the return to work. But it’s more busy now than it was six to nine months ago (because of optimism with) vaccinations underway.”From his observations Fenenbock thinks CPAs and attorney tenants appear to be coming back faster than some of the larger insurance and other institutional companies.“Maybe there’s more risk with companies coming back,” he said. “One of the things I’ve been seeing is companies going out of state.”To support that, Fenenbock has heard of some companies in Santa Clarita looking out of state, albeit they are unconfirmed rumors.“We seem to be seeing some large subleases come online,” he said, citing as an  example California Resources Corp., which went through a Chapter 11 reorganization last year and is now subleasing its 50,000-square-foot building at 27200 Tourney Road in Valencia.“For Santa Clarita, that’s a big tenant,” Fenenbock said.But Jackson put things into context, saying that office leasing is definitely better now than it had been in many months.“We definitely saw a slowdown because of the pandemic,” Jackson said. “We’re seeing now for the first time, in the last month, activity on office and retail where we have not seen for a very long time.”“With everything opening up again June 15, we’ll start to see more deals,” Jackson said.

As for construction, the contrast between Burbank and nearby markets is staggering. There is only 77,000 square feet of office space under construction in the San Fernando Valley — all of it in the West Valley — while Burbank alone has 860,000 square feet underway.

Industrial’s enduranceIndustrial continues to barrel through the pandemic with high volume of sales and leasing, with a mere 0.8 percent vacancy in San Fernando Valley.

“Industrial, investments and multifamily — those were three components have weathered the storm for us,” Jackson said. “We had a very strong first quarter (at NAI Capital).”As Savills’ Soto put it, “industrial is a completely different story. It’s completely on fire.”Prices are high because “vacancy levels are really, really low – not a lot of inventory and construction,” Soto added.Pre-COVID, the San Fernando and Santa Clarita valleys were already hot markets, he said, but the industrial sector came out of the pandemic stronger.

“A lot of it had to do with (increased) e-commerce during the pandemic,” Soto said, alluding to Amazon.com Inc., which dramatically ramped up both service and North L.A. warehouse acquisitions. “There are companies now looking for infill industrial locations; those (sales) have been very strong.”Grant Fulkerson, an industrial broker at Lee & Associates LA North/Ventura, described the first quarter as “very robust, as was all last year. … Demand outweighed supply in the market.”

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.

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