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COMMERCIAL REAL ESTATE | Market Report / San Fernando

Valley Finally Joining the Recovery Bandwagon

Office space: Rash of lease deals recharges its market. Warner Center properties set the pace.


It's clearly not leading the pack, but the long-languishing San Fernando Valley office market is finally picking up the pace after standing by while such markets as Burbank, Glendale and West Los Angeles enjoyed a commercial real estate recovery.

Tenants are filling some of the biggest empty spaces in the Valley, rents are rising and developers are talking about new construction--all good news, market watchers say, in light of the relatively slow pace at which the market has recovered from the plunge of the early 1990s.

Just last week, 20th Century Industries, the parent of 20th Century Insurance Co., announced that it will be the primary tenant, with 180,000 square feet, in a 270,000-square-foot office tower at Warner Center in Woodland Hills, to be developed by Tishman International Cos. The project, called 20th Century Plaza, is scheduled to be completed in 1999 and is expected to serve as part of the company's headquarters through 2014.

Another sign of growth is a spate of leases at Warner Center Plaza III, a 585,000-square-foot skyscraper that has single-handedly been responsible for a glut of premium office space in the market. The building was completed in 1991, just as the Southern California office market went into a free fall, and remained largely vacant until recently.

Plaza III has improved from only 20% leased a year ago to 70% leased in the wake of recent deals, said Don Hudson, director of leasing for Warner Center Properties. Among them are 50,000-square-foot leases signed by Financial Indemnity Co., an insurance company moving from Burbank, and the California Endowment, a nonprofit health-care organization.

Warner Center Properties has raised rents 30% at Plaza III since last June, Hudson said, bringing the asking rates for the building to about $24 to $30 per square foot per year.

Those rates are still lower than rents in booming Burbank, Glendale and West Los Angeles, he said, but the increases signal "a definite resurgence in our market." Hudson added, too, that those prices are only for such top-quality space as Warner Center Plaza III. Lesser space goes for lower rates.

The action at Warner Center Plaza III is good news for the entire market, said broker Jim Linn, a vice president with Grubb & Ellis Co. "Things have been getting better slowly for a couple of years, but this is a sign that they're getting better at a faster pace."

Mike Zugsmith, a partner at Encino-based Capital Commercial Real Estate, is even more upbeat, saying his company's dollar volume of business has more than doubled in the last year.

"It's improved all across the board--in office, industrial, retail, investments and land sales," Zugsmith said. "If there's even a hint that really good property is up for sale, you'll see multiple offers in no time at all."

While experts say the office market is "getting better," they point out that it's a relative term. Rising rents and a tightening market mean better business for landlords but fewer opportunities for tenants to rent space at bargain rates.

Just how much the market will tilt in favor of landlords and for how long is debatable, however. A number of large users of space are mulling decisions that could have a big impact on supply and demand, and questions remain about how much new space will be built and when.

One pivotal decision is whether Washington Mutual Bank will take over the former Great Western Bank headquarters in Chatsworth or leave the building's 227,000 square feet of premium space on the market, said Jim Lindvall, a senior vice president with Grubb & Ellis and leasing agent for the 600,000-square-foot Trillium Center in Woodland Hills.

Another question is whether CareAmerica will remain in its 200,000 square feet at the Trillium Center, give up some of the space or move out entirely. CareAmerica had announced plans to move from Trillium to West Hills Corporate Village, farther west in the Valley, but the company is reconsidering its plans and may remain at Trillium. The 600,000-square-foot Corporate Village is a 1950s aerospace facility that has been refurbished.

The quickening pace of the office market already has some brokers worrying about whether they'll be able to find enough of the right kind of offices for their tenant clients in the future, said Seth Dudley, an executive managing director with brokerage Julien J. Studley Inc. While 30% of Warner Center Plaza III is still available, he said, the space could be gobbled up quickly with a few leases, which would greatly reduce the top-quality office space on the market.

Dudley said several developers have talked about starting speculative projects--space that developers build without signed leases in the hope that tenants will be on hand when the buildings are completed. But so far, Dudley said, developers remain skittish about taking such financial risks.

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