Area office rents are creeping up: several factors push prices.

Several large financial deals in the real estate arena are already beginning to hit tenants in their pockets, and the impact is likely to grow more severe.

Office rents, which have been climbing over the past year, are likely to move higher still, inching close to and, in some cases even above, the $3 per-square-foot mark, a record for the local area.

With vacancy rates exceptionally low throughout the greater San Fernando Valley area, demand is partly to blame for the increases. So is the fact that anticipated rents at the few new office buildings under construction will reflect what has been a staggering increase in construction costs over the past few years.

But perhaps just as important, several large financial transactions that have taken place have put many of the area's class A office buildings into the hands of a very few, publicly held landlords.

With little competition and the need to increase profits for shareholders, these companies are expected to push rental rates upward beyond what the supply and demand dynamic might suggest, most brokers said.

"Average rents have gone up over the past year or two, but I think you will see them going up faster in the next year or two," said Paul Stockwell, senior managing director at Studley, which markets LNR Warner Center.

According to Studley's most recent real estate report for the fourth quarter of 2006, asking rents for office space in the San Fernando Valley overall rose 6 percent to $2.11 per square foot. Class A space, the newest and best quality buildings, saw rents climb closer to 7 percent to $2.30 per square foot.

In some areas rents have already escalated to much higher levels, reaching $2.75 per-square-foot in Sherman Oaks and in the $3- to $3.50-per square foot range in Burbank.

Brokers said that they are seeing some pullback in leasing activity as a result of what they say is sticker shock, but even those who choose to renew their current leases are paying much more.

"Four is the new three," said Trevor Belden, principal with Lee & Associates-L.A. North/Ventura, referring to the increase from the previously standard three percent rate increases on renewals to four percent. "When you're talking $2.50 or $2.75 start rates, that extra one percent makes a big difference."

Vacancy rates, which have been trending downward for more than a year now, have settled in the single digits in most markets in the greater Valley area, providing a rationale for rent increases, but that isn't the only reason.

"Rents have changed tremendously, and the vacancy factor hasn't changed that much," said Rick Pearson, a principal with Cresa Partners in Woodland Hills. "The increase, in my opinion is being driven by other factors."

Pearson and others note that buildings that are currently under construction are asking for rents well above the current market because the cost of building has gone up considerably.

The asking rates at LNR Warner Center, for example, where two new buildings are underway, is now at $2.95 per square foot, and in the Conejo Valley, rates for newly constructed buildings are in the $3 range.

But just as important, is the change and consolidation of area landlords. Most recently, The Blackstone Group acquired Trizec Properties Inc. and Equity Office Properties Trust. Douglas Emmett Inc. went public in recent months. And earlier, General Electric Co. acquired Arden Realty Inc.

With so much property concentrated in a very few hands, it has become much easier for landlords to raise rents.

"What's happening with some of the major players is they have a Wall Street mentality," said David Gribin, president of Gribin Properties. "That means they are going to be pushing rents as much as they possibly can. It could be as much as 10 percent."

The situation is most dramatic on the Westside, where brokers report asking rents are now over $5 per square foot for some buildings.

The Valley market, brokers said, is not likely to rise as sharply anytime soon.

But the escalation that has been set in motion is not likely to stop either.

"If you're Blackstone and you just paid a whole bunch of money for EOP, what's going to happen?" said Tom Festa, senior vice president at Grubb & Ellis. "Is someone going to decide to steal your tenants or join you? They'll probably join you."

Some believe that the steeper increases on the Westside will lead at least some of those tenants to relocate to this side of the hill. Others, unable to foot the higher bills for office space, may begin to seek out R&D and other industrial properties, which are typically priced below office rates.

But either way, so long as the economy continues to grow, brokers said, the leasing market will grow more expensive.

BY SHELLY GARCIA

Senior Reporter