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The Next Creative Market?

Los Angeles

The San Fernando Valley is hot and for once it's not just the blistering sun, it's the office market. Many businesses, including tech and and creative users, are making their way "over the hill" from LA. (Just try to imagine a marauding hoard of hipsters and code geeks descending upon the valley.) That's why we're holding our second annual Future of the Valley Summit on April 30. We caught up with some of the speakers in anticipation of the event.

Younan Properties chairman Zaya Younan sees a tipping point where recovery started a couple of quarters ago. The company owns several assets in the San Fernando and Conejo valleys, and signs of improvement have been consistent throughout those markets, he says. There's positive absorption, vacancies are going down, and rates are going up. (Stephen Colbert even highlighted the district on Tuesday night.) Some tenants that downsized are actually expanding again. There aren't that many office buildings being sold, he notes, but the few that have come up have generated a tremendous level of interest from buyers. He expects to continue to see uniform growth going forward. "We knew this recovery was going to happen. We just weren't sure when it was going to happen."

Lee & Associates-LA North/Ventura principal Mike Tingus points to a greater optimism in the office market. Businesses are hiring, and even the financial services firms that were on hold are making a push. At the building Mike is in, the insurance giant Swiss Re will be relocating at the end of the year to a project in Westlake Village. Crusader Insurance bought the building and will move and expand into the building from Woodland Hills. (On top of the market recovering, it's become a lot easier to get insurance, which is good because we're clumsy.) On the industrial side, three words describe the market: scarcity of product. "If you're looking for a building to expand into or even to downsize, the pickings are very, very slim in the San Fernando Valley." That's driving up the sale prices to close to 2007 levels, though lease rates remain flat.

According to Lee & Associates, just over 1M SF of office space was leased in the LA North market in Q1—down from a year ago but still enough for 31k-plus SF of positive net absorption and a slight improvement in vacancy to 16.2%. Over the past 12 months, the market absorbed 504k SF of office space, amounting to 1.1% growth in occupied space. On the industrial side, absorption rose to pre-recession levels and vacancies fell below 4% for the first time since Q4 '09. The lowest industrial vacancy rates are in the North Hollywood/Universal City, Northridge, and Reseda/Tarzana submarkets. Net absorption of nearly 626k SF was the highest since Q1 '06.

For NAI Capital SVP Cathy Scullin (with son Christopher and husband Bob last summer), the most active sectors in the central and east valley markets are healthcare and healthcare-related tenants, and entertainment. The former includes private-sector healthcare, such as groups that deal with autistic children, special needs, or mental health issues. She also sees bigger demand for creative space that offers tenants control over their own after-hours AC and easy access, but not necessarily going all the way with polished cement floors and open ceilings. That said, access to fiber or high-speed Internet is a must for a larger number of users, who won't locate in buildings that don't offer it or have the ability to easily add it. (Unless you're a lumberjack, you need the Internet.)

Lee & Associates principal Jim Fisher tells us multifamily rents in the Valley are growing—up about 4%. Submarkets that are performing the best include "anything along the boulevard (Ventura, for noobs)," the east valley including Studio City and Noho, and Valley Village. Burbank and Glendale are getting high demand from both renters and buyers. The area, including Toluca Lake, is getting strong entertainment job growth, but Jim points out, there's a lot of diversification there, too. The Conejo Valley's pretty solid because "people like living out there" and there's no new product being built. Warner Center in the West Valley, on the other hand, has 650 units coming on line.

Jim says Glendale's got a tremendous amount of development (about 2,500 units) in the pipeline due to availability of land and proximity to Downtown LA. A little over a year ago, Lee & Associates sold a site on Central Avenue in downtown Glendale, where Mill Creek Residential Trust is under construction on a mid-rise apartment community that will contain more than 200 units.

Our event will be held at Rising Realty Partners' 4500 Park Granada property in Calabasas. President Chris Rising calls the Conejo Valley an area with young, well-educated people, and foresees tremendous economic growth here over the coming years. (Young, well-educated people often become older, financially comfortable people, unless they become monks.) Several factors are spurring job growth—the medical industry is a driving force, as are back office locations for major companies. Tech and entertainment companies are making their mark and will be another area of growth.

Chris notes the Conejo Valley was born as a suburban HQ market. The company's Calabasas property was built for Lockheed and had a long history with Countrywide Credit Industries. Another of Rising Realty's properties, 225 W Hillcrest, was built as the HQ for Esso Oil and now is home to BofA. Today, the market is attracting smaller and mid-sized tenants. Speaking of attraction, here's another chance to sign up for our Summit.