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Saturday, Mar 2, 2024

Return-To-Office Conundrum

Office vacancy rates continued to rise in the fourth quarter in the San Fernando Valley and Ventura County markets, as employers are still struggling to entice employees back for in-person operations.

The year ended at a 20.7% vacancy rate, up from 20.3% the previous quarter, according to Colliers data.

“Many chief executives are still at a loss for how to best handle the return to office, Christopher Baer, a principal and office expert at Avison Young, said.

Doubt in the traditional office model has led some companies not to renew their leases. Yet, despite the rise in vacancies, office experts believe the market is in slow recovery mode and that the worst is seemingly behind.

“The San Fernando Valley office market survived a challenging 2023 with nominal leases signed and few sales transacted,” Baer said. “Submarkets sustained 660,000 square feet of negative absorption, but interestingly enough had 13,000 square feet of positive net absorption in the fourth quarter.”

Baer noted that leasing activity has picked up as many suspect interest rates to plateau by the middle of the year. He believes this year will see more subleases turn into direct leases, which will positively impact vacancy rates but not availability rates.

Solomon

“I think we’re going to see continued steady improvement,” David Solomon, a senior executive vice president and office expert at Colliers, said. “I think we’re going to continue to see rental rates slowly push up again.”

Solomon noted that he’s seen an uptick in occupancy and expects that trend to continue in the new year. However, he noted that things are “not improving on the ownership, capital side in terms of building valuations.”

“Tenant improvement (costs) have gone up exponentially,” Baer said. “It’s really difficult. What ends up happening is that landlords end up putting a lot more money in tenant improvements, and so do tenants, just in order to get their space built out for something that would have been a lot less expensive to build out pre-pandemic.”

Industrial market

On the industrial side of things, the San Fernando Valley and Ventura County market remained fairly tight.

The vacancy rate rose to 1.5%, up from 1.1% the previous quarter, according to Colliers – although experts noted this slight increase in leeway is actually healthy for the market.

Harding

“If you’re a tenant in a building and your lease is coming up and you want to move, either because of the functionality of the building, maybe you want a higher warehouse clear height, maybe you need more docks, maybe you want a different image, maybe you need more space, you go out to the market and look,” David Harding, an executive vice president and industrial expert at Colliers, said. “There just wasn’t a ton of options. (Extremely low vacancy rates) really paralyze the market a little bit because there’s not much movement. There’s nowhere to go.”

Andrew Berk, a principal and industrial expert at Avison Young, called the San Fernando Valley industrial market “chaotic and challenging.”

“You can look at numbers and look at the strength, and when you tell folks who are not in it every day that you’re in industrial, everyone looks at that asset class and says, ‘oh that must be great,’ without realizing the ramifications of coming with an extremely robust market,” Berk said. “It means that if you’re looking at a specific type of property or size, or with specific amenities, there’s only going to be one or two to choose from in a certain geography. So those challenges, and with pricing increases, it becomes a challenge to find something that makes sense for a lot of occupiers.”

In return, this has slowed transactions. “Folks who don’t have to sell, don’t want to sell,” he said. “Folks who want to buy, there’s not a lot to choose from.”

Hannah Madans Welk
Hannah Madans Welk
Hannah Madans Welk is Interim Editor at the Los Angeles Business Journal and the Inside The Valley. She previously covered real estate for the Los Angeles Business Journal. She has done work with publications including The Orange County Register, The Real Deal and doityourself.com.

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