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Tuesday, Nov 29, 2022
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SPECIAL REPORT: Industry Strong, Office Mixed in Submarkets

Warehouse space continued to be the hot commodity in the third quarter across all Valley-region markets, impacting both rents and sales activity. The office market, meanwhile, was a mixed bag in the various submarkets. In the Central Valley, where less than 1 percent of industrial space is available for lease, brokers recorded few industrial leases or sales, according to data from Colliers International. Average rent in the market experienced the biggest increase in all Valley areas compared to the same year-ago period – a nearly 23 percent jump to 92 cents a square foot. Tenants whose leases are up for renewal are forced to stay where they are because there is almost no space to move to, and they must accept landlords’ terms, said Chris Jackson, executive managing director of NAI Capital Inc. in the Encino office. A tenant client of his had to agree to a 28 percent rent increase, while another will be facing a 13 percent jump, he said. Tenants are asking landlords for three-year leases in hopes of negotiating lower rates if they drop by then. Landlords, however, are demanding five-year terms, he added. “Most tenants think the market is going to come down, and I agree,” Jackson said. “But the issue is most owners are in a position to say, ‘Sorry, I don’t want to renew. I will just go find someone else.’ I’ve seen that a lot.” Real estate buyers closed deals over the quarter because they felt the capital gains tax could increase after the November presidential election, he said. “There are definitely issues with the election,” Jackson said. “We’ve seen some sales happen now that people were going to wait on.” Brian Hennessey, senior vice president with Colliers in its Encino office, said the Conejo Valley office market is healthier than it has been but the recovery is slow. Most recently, it has taken hits from changes in office space patterns, he added. “A lot of the smaller tenants are struggling,” Hennessey said. “And the bigger tenants – the trend we’ve seen – is that they are tightening up and putting more people into less space. If they’re in a space and it’s coming up for renewal, some will downsize.” Cities are easing up parking codes and allowing buildings to have more people per parking spaces, he added, which is enabling companies to shrink space. Creative offices and the mobile office trend, which eliminates assigned work areas and private offices, also have shrunk those footprints. In the industrial investment market, the rising lease rates have increased the value of buildings, Jackson said, so it takes longer for investors to see good returns on their investments. That is slowing sales activity. Small investors, however, are still buying but choosing properties in other states where prices are lower, he added. Industrial space still can be found in Simi Valley and Moorpark, where vacancies rose since a year ago to 6.6 percent. Rents there average 59 cents a square foot. Jackson said that the vacancy rate may have been artificially inflated by a pending building sale still in escrow. Otherwise, the market remains tight, with only one building under construction that won’t come on line for some time. In Santa Clarita, only 1.4 percent of 18.5 million square feet of industrial inventory is available for lease. The 65 cents a square foot average asking rent, up a nickel from a year ago, is still far lower than the overall San Fernando Valley’s 74 cents a square foot. One example of increasing rent is 28545 Livingston Ave. W., a 173,000-square-foot industrial building off Witherspoon Parkway in the Vista Business Park of Valencia that Jackson just listed on the market. It is occupied now by spa and bath parts maker Balboa Water Group, which has U.S. headquarters in Tustin. The company plans to close its operations in Valencia and move them to Tijuana, Mexico. Asking rent will be 65 cents a square foot. Five years ago, it was 55 cents, Jackson said. As for the office market, in the overall San Fernando Valley vacancy rates fell during the quarter to 12.5 percent and no new buildings broke ground. More tenants moved into the area – about 142,000 square feet – than left, reversing the negative net absorption of the same period last year. In turn, rents rose 6.4 percent to $2.33. In the West Valley, rents jumped 5.5 percent while East Valley rents rose 7.4 percent. Burbank commanded the highest rent in all Valley areas at $3.07, and that was down from the prior quarter. It also had the highest vacancy rate – 17 percent – in L.A. County, and more tenants left than moved in. Tenants continue to leave the Conejo Valley without new ones replacing them – a difference of 59,000 square feet compared to a year ago, according to Colliers data. Vacancy rates grew substantially over the quarter compared to a year ago. However, rents grew 4 percent to $2.28. Some companies leaving the Conejo Valley are moving toward Santa Monica and Playa Vista where their targeted workforce lives. “There are no strong economic drivers from a tenancy standpoint that create the need for office space (in the Valley,)” Hennessey said.

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