Brokers: Small Demand for Big Office Buildings

REAL ESTATE: Market shifts as tenants seek creative space, smaller footprints.
San Fernando Valley Business Journal | By Carol Lawrence

On a hill overlooking Simi Valley, a giant office building has sat vacant for a year. Unable to attract a single large tenant to the vast space, its owner plans to redevelop it into apartments, some retail and maybe a hotel – with a much smaller office footprint.

A different scenario is unfolding in Calabasas, a bedroom community about 25 miles west. There, small offices that can be rented immediately with no time minimum are in demand.

Large office spaces – 80,000 square feet and more – are sprinkled across the Conejo and Simi valleys, but many have sat vacant or part-vacant for years. While some can be cut up into smaller, multitenant and creative spaces popular with certain industries, it’s a costly process. Those that can’t are weighing down their markets and keeping local vacancy rates in the double digits.

The conditions are presenting an opportunity for Irvine-based Premier Business Centers, which caters to an increasingly mobile workforce that often operates outside the traditional 9-to-5 workday. Clients can walk in and sublease offices as small as 84 square feet in a shared environment in top-notch buildings. The business has expanded since the early 2000s from the Tri-Cities, L.A. and Orange counties and the western San Fernando Valley to recently take about 14,500 square feet in Calabasas.

“We’ve seen an unprecedented growth in entrepreneurs, startups and those who work in the gig economy – who work for multiple employers,” said Mark Burge, director of marketing for Premier. “Today it’s about where do people want to work, where do they need to work, and when do they need to work.”

Flat market

The Conejo Valley office market between Calabasas and Newbury Park has been slow to recuperate from the economic downturn compared to the San Fernando Valley. Vacancies were between 13 percent and 15 percent in the third quarter, according to NAI Capital Inc. in Encino and L.A.-based CBRE Group Inc. More space came onto the market than was leased during the quarter by about 76,500 square feet.

Brokers cite several factors keeping vacancies high, especially in larger buildings.

One is more employers are sharply trimming the real estate they occupy as they push to be more efficient, said Jeremy Barbakow, senior vice president at NAI. They are doing that by encouraging telecommuting when possible, and consolidating several locations into one space with much smaller footprints.

“They don’t have to have two conference rooms, two kitchens, two reception areas, etc., and they can reduce the overall size by 30 percent,” Barbakow said. “And when they do move, they are more efficient in how they build out their space as well.”

Michael Slater, a senior vice president with CBRE, gave as an example an 80,000-square foot building in Agoura Hills. It sat empty since 2008, and took more than a year and a half and four tenants to fill the space, the last of which was the Los Angeles Rams.

Filling the space helped reduce the vacancy rate but still left a negative statistic on the market because some tenants downsized from larger spaces. That’s been another common theme Slater has seen – as one company grows their square footage, another reduces it by a greater amount.

Westlake Village is another Conejo Valley market struggling with high vacancy levels, which rose over the third quarter to 11-plus percent from below 10 percent a year ago, Slater said.

There is activity in the markets, but companies aren’t moving here, he added.

“We’re having a hard time drawing companies from L.A.’s West Side because students and millennials want to stay on the West Side, even though they are always in traffic. They are willing to pay the freight to live there,” Slater said. Companies there pay more than $4 a square foot in rent, he added, but can’t move to the less pricey, less congested Conejo Valley because their employees don’t want to move – until they start having families, he added.

Carlo Brignardello, a 25-year industry veteran and principle with Cresa in Los Angeles, linked the market’s stability to a long list of acquisitions of local businesses, including Illinois biotech Baxalta, which was bought by Dublin-based Shire after being divested by drug maker Baxter International; Calabasas audio technology firm DTS Inc., which was acquired in October; and Kythera Biopharmaceuticals Inc., now owned by Allergan plc.

While each may continue to have a presence here, Brignardello said, “they’re not going to be making this a center of growth.” Westlake Village’s PennyMac Mortgage Investment Trust has taken a lot of local real estate – but it’s just one company, Brignardello said, and the market needs many more like them.

“We don’t have any fuel creating a dynamic market that is consistent,” he said, although it has improved. “That’s the nature of any market, that when you don’t have other things pushing things up, you’re going to have factors keeping a market stable.”

The future users of big office space may not come from Premier’s clients, either.

Martin Alon, general manager for the Sherman Oaks, Woodland Hills, Panorama City and the new Calabasas locations said his tenants are entrepreneurs, independent contractors and employees of companies a distance away who don’t want to commute and want to telecommute instead. Even big companies are leasing short-term space for project teams that move around.

“I think businesses these days have more mobility, and they are more transitory,” Alon said. “I don’t think it’s the age of the big stationary building anymore.”

Highest, best use

The nearly 300,000-square-foot giant building overlooking Simi Valley at 400 National Way is one of the two remaining from the 10-building portfolio L.A. developer Rising Realty Partners bought with a partner from Bank of America Corp. in 2013. The bank inherited the buildings when it acquired defunct mortgage lender Countrywide Financial Services of Calabasas in 2008.

Bank of America moved out a year ago and Rising hasn’t been able to find a new tenant, said Tyson Strutzenberg, chief operating officer. The building’s massive size has been one factor, and the market’s other vacancies have driven down what potential tenants expect to pay, he added. Plus, tenants who want to be in Ventura County have preferred to be along the 101 Freeway rather than the 118 Freeway that the building abuts.

Low occupancies plague Simi Valley and Moorpark. Their combined third-quarter vacancy rate was 21 percent in a 3.2 million-square-foot market, according to NAI.

Rising is plenty familiar with successful adaptive reuses of big buildings but renovating 400 National Way into a multitenant, creative office space, which is what the market wants now, would be a huge speculative project and “is not as likely a scenario for us,” Strutzenberg said.

As a result, Rising has applied to the city for approval to redevelop the 43.5-acre property into 190 apartment units, a 100- to 130-room hotel and up to 70,000 square feet of commercial space, which could be office, retail or education, Strutzenberg said. The City Council gave its nod of approval to the prescreen application last year.

Should the plan move ahead, the office component would have layouts and features that Rising’s other tenants are doing, such as indoor/outdoor spaces, areas for employees’ pets, high speed internet and wiring, open floor plans and few individual offices, he added, enabling tenants to adapt the space as their needs change.

“We see a lot of companies leaning on their office space as a recruiting tool, so that the environment that they’re building is the first message they send to perspective employees,” Strutzenberg said.

Rising envisions an integrated community, a model that Rising has done before and it’s been “wildly successful,” he said.

“This project in Simi speaks to the demand in the marketplace, and the preference in the marketplace,” Strutzenberg added.

Shaun Bieniek, a vice president with Daum Commercial Real Estate Services in Camarillo, said that to work for the area’s more common small tenants, 400 National Way would have to be subdivided into blocks of 50,000-square-feet or smaller. That would have left too much common space which tenants don’t want to pay for, he added, and the economy doesn’t have enough big companies to take the entire property.

“Investors and developers are going to look at what is the highest and best use – what’s the best return,” Bieniek said.

He sees a similar fate for another Simi Valley giant, a 240,000-square-foot property on 3041 Cochran Street when the lease held now by Farmers Insurance Group of Cos. in Woodland Hills expires in 2018. It’s mostly vacant now.

“We are changing the way we work,” Bieniek said. “Redevelopment is what I foresee in the short-term for those bigger spaces.”