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Q1 Data Paints Partial Picture

At first glance, the numbers from Colliers International about commercial real estate in the first quarter might seem negative, but the story behind the numbers should give no cause for worry, according to brokers and economists who work in the market. See Also: Q1 2018 Submarkets In Burbank, office vacancy rate rose to 12.4 percent and tenants vacated 102,900 square feet of space, but those figures don’t paint a complete picture. “This is a very competitive office vacancy rate now,” said Mark Schniepp, director of Santa Barbara-based California Economic Forecast. “The 102,000-square-foot negative net absorption is not much actually, and vacancy now is lower than it was a year ago.” Glendale tenants gave back 113,000 square feet during the quarter, reflecting the staggered exit of Nestlé USA from 12 floors at 800 N. Brand Ave. for new corporate digs in Virginia. Another tenant in the building, Children’s Hospital, will take some of the space, but not enough to make a big dent. “You will probably see some of that space get absorbed later this year,” said Eric Kenas, market director of research at Cushman & Wakefield, who believes Glendale is a major lease away from an upswing. Plus, Glendale has many apartment units in development. “Housing is a big factor, whether it’s going to draw people or a company looking for their employee base,” Kenas said. “With higher supply, hopefully it’s more cost effective for companies.” Unlike Glendale, Burbank hasn’t seen tenant abandonment on the level of Nestlé. However, subleases contributed to Burbank’s negative absorption figure this quarter, Kenas said. Case in point: At 2255 N. Ontario, Entertainment Partners forfeited 18,000 square feet. “There were about three or four buildings that had changes that impacted absorption to be negative,” Kenas said. “All the activity in Burbank with leasing will or should show a different story the rest of the year.” Another factor in the negative numbers is methodology. Real estate researchers only track directly available square footage, not subleased space. If tenants try to sublease space and fail, they often turn it back to the landlord, who puts it on the market for direct lease. Statistically, it appears space has been vacated when in fact nothing has changed. Overall, the Burbank market is robust, despite the numbers, experts agree. “Burbank has been a very strong performer and has historically been the center of the studios and media and really will continue to be that way,” said CBRE Los Angeles North Region Managing Director David Josker. “There wasn’t enough large move-ins to offset the changes (but the negative absorption) is not a sign of anything unhealthy,” said Kenas, who added that rates for class A office suites at Burbank Media District are presently more expensive than in Pasadena. Josker said the major entertainment studios based in Burbank and their animation divisions have spun off ancillary companies, including video and e-games, that ultimately sign office leases locally. He likened it to the way Jet Propulsion Labs and Cal Tech have driven spin-off tech companies in Pasadena. “There are these tech incubator companies coming out of these studios and they’re looking for space,” he said. “That’s a trend we’ve seen.” Conejo, Antelope Valleys “California has some of the tightest industrial market in the nation,” Schniepp said. Driving the paucity of inventory is “a rapidly expanding economy and all the stuff coming in from the ports in Oakland, San Diego, Long Beach, L.A. All that stuff comes in and they store it.” In Conejo’s economic picture, “Office is off the table, industrial is needed badly,” the economist added. Conejo Valley posted 80,900 square feet of office net absorption in its first quarter for the year and 414,800 square feet under construction in the industrial sub-sector. The latter total reflects what boils down to one outsized, 2017-launched project underway locally: Sares Regis Development Group’s 30-acre, nine-building Conejo Spectrum Industrial Park. “There is a lot of action that’s the biggest project going on right now,” Schniepp said of the complex, to be completed by year’s end. John DeGrinis, senior executive vice president of Colliers North Los Angeles, has been directly involved in the leasing of Conejo Spectrum, a 500,000-square-foot cluster about to see completion within 60 days. “Since 2017, we have not had any product. It’s been sub-1 percent historically, there’s not a lot of land available in that market,” he said. After signing a pre-lease last year with Atara Biotherapeutics, Inc., DeGrinis said he locked up three more leases by soon-to-be-announced tenants. “Activity is great right now,” he said. “It’s fantastic product and well thought-out.” Conversely, Antelope Valley, where 2018 first-quarter square footage under construction totaled 225,800 square feet, is not sitting pretty. “Antelope Valley got hit hard in the housing bubble and financial crisis,” Schniepp said, “and they also got hit hard by the drought. That stopped a lot of projects.” Schniepp said that since the Great Recession, it’s been “a struggle to come back” and he sheepishly admitted that Antelope’s economics have been so unchanged, he doesn’t really study that region anymore. “At least it’s something,” Schniepp said of Antelope’s 225,800 square feet of industrial in development. Antelope Valley is a peculiar submarket, according to Colliers’ DeGrinis. With the type of available space offered, Antelope Valley usually attracts major manufacturers such as Lancaster’s Chinese subsidiary BYD, maker of electric buses. With land value at less than $10 per square foot, Antelope Valley is a bargain, industrial-wise. However, there’s not a crush of new warehouses in development. “Right now, we haven’t seen it,” DeGrinis said, and it’s “really hard to determine” if the continuing build-out from Los Angeles will eventually heat up interest in Antelope. DeGrinis said it will depend on population growth and a local workforce willing to take jobs for reduced wages in exchange for less commute. With the defense industry based in Antelope, there is definitely talent there, he said. Meanwhile, Conejo Valley is popping. Look for Conejo’s industrial stats to positively change within a few quarters as several big projects come on the market, including a pair of industrial parks in Moorpark: The Patriot Commerce Center’s Phase II and Moorpark West Studios. DeGrinis deemed 2017 “an excellent year for industrial throughout the region” but with an asterisk: Is the party about to end? “The challenge is there is not enough product,” he said. “That’s the frustration most users, brokers and companies are feeling these days.” As a result, “2018 is somewhat of a continuation of 2017.”

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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