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Tuesday, May 30, 2023

Property Managers Move into Retention Mode

The San Fernando Valley region is experiencing one of the tightest industrial and office real estate markets in recent history, according to executives at companies on the Business Journal’s annual lists of property management firms. The squeeze comes as good news for property owners who saw a significant decrease in lease rates and increase in lease concessions during the Great Recession. “The Valley has record low vacancies, rents are increasing and lease concessions are decreasing,” said Todd Nathanson, founder and president of Encino-based illi Commercial Real Estate, the third-ranked company on the management list (see page 17). Nathanson added there’s also strong sales and investor activity in the Valley region. But current market conditions also mean property owners and managers must work hard to retain tenants amid steadily increasing market rates. Another challenge is that higher rents and low vacancies make it difficult for smaller companies to negotiate favorable lease terms. Rising numbers In the third quarter of 2017, the average asking lease rate for industrial property in the Greater San Fernando Valley was 82 cents per square foot and overall vacancy rate was 1.2 percent, according to CBRE Group Inc. in Los Angeles, the second-largest management firm on the list. For the same period, the average asking lease rate for office was $2.51 per square foot and overall vacancy 12.1 percent. Average asking lease rates for office and industrial have been steadily increasing, and vacancies for both markets decreasing, in the greater Los Angeles area since Q3 2013, according to the Los Angeles-based brokerage. Year-over-year average asking lease rates for industrial property in the Greater Los Angeles area increased 9 percent in Q3 2017, and it’s expected to grow another 4.4 percent by Q3 2018. Average asking rates for office increased year-over-year by 8 percent during the same period and are expected to increase another 1.8 percent by Q3 2018. “From a property management perspective, rents are going up big time,” said Ross Thomas, chief executive of Delphi Business Properties in Van Nuys, the number 14 company on the list. “This is the tightest market I’ve seen. The challenge is for owners to get rents up to market.” Many industrial and office tenants got used to lower rents during the Great Recession, he said, and it can be a shock to go through a rate increase. Property managers are helping justify the increases by running well-managed properties, being responsive to tenants and making necessary upgrades. For example, 10316 Norris Ave. in Pacoima is a 123,000-square-foot multi-tenant industrial complex that has experienced improvements. Thomas said the buildings have recently been painted, the parking lots are slurry coated, the landscaped grounds are well maintained and the interior of one unit was recently renovated after a tenant moved out. “You want to be reasonable with good tenants,” said Thomas. “The sweet spot is charging higher rents but keeping them below what tenants can find elsewhere. Property managers are also definitely more involved these days (with the properties).” Maintenance mandate Mark Trueblood, owner and chief executive of Trumark Real Estate Management Services in Glendale, number eight on the list, is using the current market as an opportunity to invest in more efficient property management software to help with collecting rents and getting ahead of lease renewals. He echoes Thomas’ statements about the importance of investing in properties to attract and retain tenants. “We need to keep buildings in tip-top shape and polished up,” said Trueblood. On the other side of the “landlord’s market” are companies and brokers struggling to secure favorable lease terms and ideal properties. Landlords will go to great lengths to secure a tenant that is a large, well-established company with strong credit, according to Chris Tolles, an industrial property specialist and director with Cushman & Wakefield in Los Angeles, the number five company on the list. But it’s tough for smaller firms looking to expand or move into the area. “Smaller companies are paying huge rents and having to put down larger security deposits than ever,” said Tolles.

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