Sales activity paces action; vacancy rates continue slide.

WITH demand high and quality space tight, a landlord's market prevailed in the San Fernando Valley during the fourth quarter.

While asking rents were essentially fiat, rising a penny to average $2.23 per square-foot across the Valley's submarkets, rental concessions were pulled back. This helped create what brokers call "backdoor rate hikes."

Anchor points, like the corridor of three-story office buildings along Ventura Boulevard from Encino to Sherman Oaks, felt the squeeze. Vacancy rates came in at 7.8 percent in the Central Valley, down nearly 3 percent from the 10.5 percent that prevailed at the end of 2003, according to Grubb & Ellis Co.

Cathy Scullin, senior vice president in the Encino office of NAI Capital Commercial, said the Ventura Boulevard corridor, populated mostly by 2,000- to 3,500-square-foot tenants, remains in high demand, despite the dearth of new product.

"There's so little office space to choose from that a 5 percent increase in lease rates this year is realistic, given the basics of supply and demand," Scullin said. "At the beginning of 2004, tenants were all getting a month of free rent for every year leased. That has disappeared."

Tightened Valley rentals were mirrored in positive absorption numbers, with 261,987 square feet taken off the market in the October-December quarter. That capped a year that saw more than 1 million square feet absorbed across the Valley.

The bulk of the leasing activity came in smaller deals, including ASK Financial Inc.'s 4,100-square-foot, 5-year lease at 17401 Ventura Blvd. in Encino. The deal was valued at about $500,000.

Sales and marketing firm Under the Sun Promotions took 4,600 square feet in a 5-year deal at 16001 Ventura Blvd., also in Encino, in a deal valued at about $485,000.

Larger Central Valley transactions included the sale of the 143,664-square-foot Tri-Center, at 5990 Sepulveda Blvd. in Van Nuys. Lowe Enterprises sold the Class-A office property to Jamison Properties Inc. for $26 million, or more than $180 per-square-foot.

Zaya Younan, president and chief executive of Woodland Hills-based Younan Properties, said the Tri-Center deal was typical of fourth quarter Valley investment transactions, which he described as "exuberance without a solid foundation."

"There's confidence that the Valley is a safe haven for office product," he said. "But if interest rates go up, buying in at a 6.5 to 7 percent

cap rate won't yield a minimum return."

Younan noted that asking rents in the Valley haven't climbed as quickly as other areas of the city.

"The capital influx in the Valley is coming from smaller buyers trading up, not institutional investors," he said. "As the Valley demographic becomes more low-income, and office properties continue to age, I think companies that have to pay $185 to $200 per square foot will go over the hill in search of better value for the same price. The lack of new quality space is already driving the big players out."

Younan sold two of his office properties in the fourth quarter. Younan Plaza, a 30,000-square-foot, five-story building at 15456 Ventura Blvd. in Sherman Oaks, went for $6 million to an undisclosed private investor.

In addition, Value Home Loan paid Younan Properties $12.5 million for the 62,000-square-foot Warner View Corporate Center, at 5959 Topanga Canyon Blvd. in Woodland Hills. Younan had bought that property for $9.4 million less than a year ago.

Many fourth quarter deals in the West Valley, which brokers said was picking up steam, were focused on Warner Center.

Deals included a $325 million purchase of the 1,279-unit Warner Center Apartments by a consortium of buyers led by Lehman Bros. The 29-acre site will be turned into condominiums, as will the nearby 204-unit Forest Glen apartments at 20218 Cohasset St, which StarPoint Properties LLC sold for $34 million to a San Francisco-based investment firms.

While developers moved toward residential in the West Valley, investors flipped what remained of quality office space.

Commercial deals were led by Santa Monica-based Douglas Emmett's $162 million pick-up of the 655,000-square-foot Trillium, at 6300-6320 Canoga Avenue. The 90 percent-leased project was sold by Beacon Capital Partners. The East Coast investment firm paid $134 million for the high-rise complex three years back.

Arden Realty purchased the 253,698-square-foot Warner Corporate Cent&, 21300 Victory Blvd. Grosvenor, an international property development group based in the United Kingdom, sold the 96.5 percent leased, 12-story tower for $64.5 million. That sale moved Arden's West Valley portfolio to 1.7 million square-feet.

Combined with the Douglas Emmett deal, the two L.A. firms now control nearly 60 percent of the 6.3 million square-feet of office space in Warner Center.

Office landlords weren't the only one calling the shots in the fourth quarter. With industrial vacancies running below 1.5 percent in the submarket, firms needing to expand paid record prices for quality product.

"We sold the final building of a 400,000-square-foot project at the Van Nuys Commerce Center," said Mike Tingus, president of Lee & Associates in Calabasas. Nearon Enterprises sold the 40,387-square-foot building at 7751 Hayvenhurst Ave. in Van Nuys to Old Master Products, a hard flooring company that relocated from a 20,000-square-foot Van Nuys site.

Major Deals:

* Douglas Emmett paid $162 million to buy the 655,000-square-foot Trillium on Canoga Avenue from Beacon Capital Partners.

* Jamison Properties paid $26 million for the 143,664-square-foot Tri-Center in Van Nuys.

* Arden Realty Inc. purchased the 253,698-square-foot Warner Corporate Center from Grosvenor for $64.5 million.

* Warner View Corporate Center in Woodland Hills was sold to Value Home Loan by Younan Properties for $12.5 million.

* A partnership led by Lehman Bros. paid $325 million for the 1,279-unit Warner Center Apartments, for conversion to condominiums.

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