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Slowing Rental Rates + Increased Vacancy = Tenant Advantage

By Andrew Havill

As Los Angeles County’s office market continues its stable growth, the San Fernando Valley has briefly fallen off pace. Los Angeles County has seen average office rents climb to $3.02 per square foot, up from $2.61 per square foot just three years ago, representing an average all-in rental rate growth of 8% per year.

The same could be said for the San Fernando Valley until late 2017, when we started to see a slowdown of rental growth along Ventura Boulevard, stretching from Sherman Oaks to Woodland Hills. This stretch of over 20 million square feet of space has only had an average rental increase of 3.6% over the last 12 months, marking the average price per square foot at $2.71, which is $0.31 behind the county’s average and over 100% behind on rental growth. Historically, these markets have had lower rents than nearby submarkets like Santa Monica or Westwood, but what’s striking is that the gap of rental rates is separating even further.

Additionally, over the last 12 months we have seen a combined negative net absorption of 317,800 square feet, with Woodland Hills leading the way at a negative 122,000 square feet due to HealthNet’s departure from around 100,000 square feet in Warner Center Tower 3. Net absorption is a figure that tracks the total amount of space leased relative to the total amount of space that becomes vacant either due to a tenant vacating or new construction. Other than adaptive reuse developments and value add renovations like Douglas Emmett’s purchase and the transformation of the declining Sherman Oaks Galleria in 1996 for $51 million, there have not been any additions to the supply of Class A office space since the 1990s. Combining the lack of new supply and rising vacancy rates in the area, these numbers are less than ideal—for landlords, that is!

The negative net absorption and increase in vacancy rates over the last 12 months along Ventura Boulevard has taken many people by surprise, and has made the San Fernando Valley an even better alternative location to the exponentially increasing West LA market. Historically, less desirable markets usually are the first to feel the impact in a recession, and more supply constrained markets have more staying power. While some could view the softening of this submarket as an early indicator of softening demand countywide, I’m optimistic that it’s not. Rather, this is an opportunity for landlords to reinvent themselves, create better options for their current and prospective future tenant bases, and emerge stronger than they were before by creating value for their customers.

What to expect in the coming years…

We are starting to see landlords in the area more willing to make considerable investments in building upgrades externally, as well as within common areas, tenant’s suites and luring amenities. Additionally, industrial owners have begun transforming their warehouse spaces into creative office campuses, attracting some of the top tech companies in Los Angeles, like FloQast. Two campuses in the area that have been completely transformed are The Ranch in Van Nuys and The Mix at Harman Campus in Northridge.

Additionally, the Olympics coming to LA in 2028 are expediting the public transportation initiatives that have been far outdated—just ask the 405 commuters. These coming transit-oriented districts are going to see a dramatic transformation in structural surroundings. For example, the LA City Planning Commission has recently adopted a plan to dramatically transform Woodland Hills through the Warner Center 2035 Specific Plan. This aims to transform Woodland Hills around the Metro Orange Line station, which will bring 80,000 jobs, 19,000 housing units and 14 million square feet of new commercial space to the area. Change is coming.

How will this affect tenants?

Rising vacancy rates as a result of negative net absorption are giving local tenants increased leverage against landlords. It’s a great time to start negotiations with landlords, as they are more willing to give into concessions like rental rate, rent abatement, tenant improvements, parking discounts, etc. than in past years.

Now more than ever, tenants will have the ability to capitalize on their enhanced negotiation power in the market and negotiate attractive short or longer-term leases to support their company’s continued growth needs. With all of these changes coming, we are eager to see the transformative growth that is coming to San Fernando Valley and our team at Hughes Marino is excited to help companies find the perfect space to thrive.

Andrew Havill is an associate with Hughes Marino, an award-winning commercial real estate company specializing in tenant representation and building purchases with offices across the nation. Contact Andrew at 1-844-662-6635 or andrew@hughesmarino.com to learn more.



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