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Focus On Labor Costs, Not Real Estate Costs, Driving San Fernando Valley Office Growth

Citibank and City National Bank Buildings, Ventura & Sepulveda, Sherman Oaks

The San Fernando Valley is rapidly becoming the hot new spot for corporate tenants seeking less expensive, more flexible office alternatives.

The larger Valley lacks proximity to the traditionally more successful markets, creating employer concerns about employees’ willingness to make the drive from other parts of the city. But the Sherman Oaks and Encino neighborhood of the Valley rests just north of West LA, rendering its easily accessible location a significant value-add for companies considering moving there.

The employee commute is gradually becoming more acceptable for Valley employers whose talent resides primarily in West LA or downtown Los Angeles.

Evolving Office Priorities, Evolving Locations

LA employers are focusing more on workplace efficiency than before, searching for telecommunication spaces, shared workspaces and proximity to parts of the city where clients might work.

“Twenty years ago, if you opened up a space, the rent per square foot was a critical decision-making factor,” CBRE Senior Vice President David Solomon said. “It’s still important today, but it is typically second to labor costs, which in turn dwarf real estate costs these days. LA workspaces have to be more comprehensive in their offerings than ever before.”

Much of LA’s professional workforce remains based in the entertainment industry, and the Valley’s old reputation as the stronghold of utilities, infrastructure and adult entertainment had historically rendered it less popular with corporate clients on the hunt for new offices. The San Fernando Valley market has since improved its vacancy rates compared to DTLA, resulting in higher asking rates.

Millennials in a co-working space

"There have been fewer new developments and redevelopments in the San Fernando Valley," Solomon said. "It's a shallower market compared to the rest of Los Angeles, with noticeably less office supply — but the supply that is there consists largely of highly efficient offices. Consequently, landlords are achieving higher rents."

The San Fernando Valley’s Relative Stability

The growth of best-performing LA markets, such as downtown and West LA, is much more volatile, often with high highs following low lows. The San Fernando Valley, Solomon said, is more consistent, with vacancy and rental rates not fluctuating nearly as much.

In addition, construction costs in the Valley are lower, according to LA-based general contractor Parker Brown Inc. CEO John Parker.

“Parker Brown is working on several projects in the Valley, and the rates for workers there are significantly lower,” Parker said. “Parking is more plentiful for workers and there are many choices of suppliers in the Valley, keeping the costs lower.”

The Valley has driven much of the growth in positive net absorption (129,500 SF) in Q2, leading the charge on the recovery of citywide losses stemming primarily from major entertainment office exits in Q1. While West Los Angeles, the mid-counties and DTLA have witnessed incremental increases in vacancy rates from Q2 2016, the Valley’s rates decreased a full percentage point.

Employment is solid — 4% citywide, down from 4.5% this time last year. Though the predicted supply coming online is negligible, absorption predictions remain on a steady upward path.

“We’ve had and survived a mortgage meltdown, a broader economic meltdown, and when those things happen, those are the kinds of things that impact the market despite strong fundamentals,” Solomon said. “Barring another Great Recession, the Valley’s growth is expected to continue.”

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