Commercial Landlords Face Continued Down Market

Running a business in the San Fernando Valley became too much of a hassle and expense for Tom Evans, president of Windtree Financial. After eight years at Ventura and Sepulveda boulevards in Sherman Oaks, Evans and his mortgage banking company left the Valley two months ago for cheaper rent and more open space outside Los Angeles County.

The Westlake Village Executive Office Park offered Windtree free parking and freedom from Los Angeles’ 10% parking tax. That saves Windtree $1,400 a month. Not having to pay the Los Angeles business tax saves Windtree another $1,000 a month, Evans said. And the company is saving even more money by downsizing from 6,500 square feet of office space to 4,000 square feet.

Windtree’s former landlord in Sherman Oaks did offer to match the deal offered in Westlake, but Evans and his staff decided that they were tired of the Valley and its rising crime rate. There were several break-ins at Windtree’s old offices and on the ground floor of the building, Evans said, “you could count bullet holes in the windows.”

Unfortunately for many commercial landlords in the Valley, Windtree isn’t the only tenant that’s been downsizing or looking to move elsewhere.

“Tenants are very bottom-line conscious and they’re shifting out of the city of Los Angeles,” warned Michael Zugsmith, president of Zugsmith-Thind Commercial Real Estate Services in Encino. “We have had an increase in the vacancy factor in Encino and Sherman Oaks in the better buildings.”

According to Zugsmith-Thind, the vacancy rate for these buildings jumped from 14% in the first quarter of 1993 to 17% in the second quarter. The vacancy rate for so-called class-B buildings is even higher. “We’ve seen tenants either fail or move out of the area,” Zugsmith lamented.

An example of the woes being suffered by the Valley’s commercial landlords is the Develcore Center at 16030 Ventura Blvd. in Encino. Liberty Financial Bank Group moved out in May as it consolidated its Encino operations into its Boston office. Pacific Rim Assurance previously vacated a sizable chunk of space, too.

In April, the building’s lender filed a notice of default on a $28-million deed of trust. Local brokers estimate that the 155,000-square-foot building is worth between $15 million and $18 million. Real estate brokers speculate that Develcore Group, the investment group that owns the building, might walk away from the building. Develcore refused to comment.

“A lot of people are losing their buildings,” Zugsmith said. “The era of the entrepreneurial developer is fading as institutions take over ownership.”

The Voit Cos. is one of the few lucky managers and developers because its financial resources have allowed it to keep going in the face of hard times. Voit’s Warner Center Plaza III office tower in Woodland Hills was completed in November, 1991, and is still 100% vacant.

The company has strong financial backing and several leases are being negotiated, said John Gebhardt, Voit’s vice president. But, he conceded, there’s not one signed lease to report at the 592,000-square-foot office tower.

Despite 90,000 square feet of newly signed leases in Warner Center so far this year, the empty Warner Center Plaza III building helped keep the West Valley’s office vacancy rate at about 20% as of April 1, according to the real estate brokerage Julien J. Studley Inc.

If Warner Center Plaza III was to suddenly fill up or disappear altogether, Warner Center’s office vacancy rate would actually be less than 13%, said Seth Dudley, a senior vice president at Studley. Even this lower vacancy rate wouldn’t last for very long, though. Transamerica Insurance Group announced that it wants to vacate about 240,000 square feet in Warner Center next year. And 20th Century Insurance is planning to vacate about 200,000 square feet in Warner Center and move to the proposed Warner Ridge development nearby.

For now, Voit is working hard to fill up as much space as it can in Warner Center. “Voit is very aggressive and anxious to make deals,” Dudley said. “They’re actually making better deals than they were a year ago.”

While Voit goes after larger tenants that might occupy entire floors, landlords in the Conejo Valley are working hard to nab small- and medium-sized tenants from the San Fernando Valley.

Some projects in the Conejo Valley have been so successful, Dudley said, that there’s been a 10% increase in rental rates in the Conejo Valley in last 18 months. This compares to a 15% drop in Ventura Boulevard rents in Sherman Oaks and Encino, they said.