Tech Wreck Brings Abrupt Halt to Declining Vacancies.

THE technology meltdown on Wall Street has helped cool much of the San Fernando Valley office market.

With the exception of the Central Valley, where the office vacancy rate declined by 2 percentage points, vacancies rose or remained flat in most of the region's submarkets in the third quarter. Absorption rates, a measure of the net balance between space vacated and space leased, also saw steep downturns in the quarter, with two submarkets, the East Valley and the Conejo Valley, moving into negative territory.

Although some of the negative net absorption was due to new space coming onto the market, brokers noted the dearth of deals during the quarter was noteworthy, particularly in light of the strong first- and second-quarter activity.

"We normally see an August slowdown in commercial real estate because a lot of decision makers are on vacation," said Tom Festa, a broker with Grubb & Ellis Co. "This year, it slowed down in July and, although things picked up in September, it never got moving at the first-quarter speed."

The East Valley, which includes Studio City, North Hollywood and Universal City, took the hardest hit, showing a 4-percentage point rise in vacancy to 11.8 percent, up from 7.7. percent in the second quarter, according to Grubb & Ellis. But even the area's hottest submarkets had lackluster performances, with the West Valley remaining almost flat at 10.4 percent, compared to 10.5 percent in the second quarter, and the Conejo Valley showing an increase in vacancy to 6.3 percent from 5.8 percent in the second quarter.

In the West Valley, net absorption dipped to just over 86,000 square feet for the third quarter, down from nearly 138,000 square feet in the second quarter.

(The Health Net lease, amounting to more than 300,000 square feet of space in Warner Center, was not reflected in the Grubb & Ellis numbers because it had not closed by the end of the quarter.)

Similarly, Conejo Valley suffered a negative net absorption of 34,000 square feet, compared to the second quarter when tenants moved into 149,000 square feet more than they vacated.

Only the Central Valley, which includes Sherman Oaks and Encino, recorded strong leasing activity in the third quarter. With a positive net absorption of almost 248,000 square feet, the office vacancy level there dropped to 9.5 percent in the third quarter, from 11.5 percent in the second quarter.

The Central Valley benefited from a number of smaller deals, a pattern that began in the second quarter of the year.

"We've seen a good deal of renewals, and then, if the tenants left, we filled the space with another tenant of 3,000 or 4,000 square feet," said Tony Acerra, leasing agent for Douglas Emmett & Co., which owns and manages a number of office buildings in the Central Valley.

Although the Conejo Valley has emerged as the address of choice for many new technology companies, the Nasdaq market correction in April appears to have had wide repercussions in the real estate sector, brokers said.

"There was a point when we were seeing 30 percent to 40 percent of tenants that were tech-related looking at space," said Brian Hennessey, vice president at Grubb & Ellis. "Now it's down to 10 percent to 20 percent, so that tells you that segment of the market is not as strong as it was in the first two quarters of the year."

Many of the prospective tenants out looking for space are entertainment-related companies, some brokers said.

"I see a lot of production companies looking for short-term office space because they're all afraid the strike will hit," said Stacy Vierheilig, a broker with Charles Dunn Co. Inc., referring to the anticipated screenwriters' strike next year. Vierheilig, who was surprised to hear the high vacancy rates reported in the East Valley, said she has had difficulty finding appropriate space for her production company clients in the area.

"I have no place to put these people," Vierheilig said. "If I had 20 buildings between 5,000 and 20,000 square feet, I could lease them in a minute."

Part of the reason some brokers' views run contrary to the Grubb & Ellis report can be traced to the office building at 6400 Laurel Canyon Blvd. in North Hollywood.

Washington Mutual Inc. became owner of the building as part of its acquisition of Great Western Financial Corp. several years ago, and moved most of the employees to its other offices. But the building was recently sold and brokers have begun marketing the vacant space, about 80,000 square feet.

"That's 3 percent of the market," said Mark T. Leonard, a broker with Cushman & Wakefield, who is marketing the property. "There's your (vacancy increase) percentage right there.

Leonard said he has had strong initial activity on the building, although no leases have been signed yet.

Other brokers said the numbers reflected in the third-quarter report do not lead them to conclude that a wholesale slowdown in the real estate market is at hand.

One indicator supporting their conclusion is the continued strength in rental rates, which increased for class-A properties in all but one Valley submarket.

"We are definitely seeing increases in rents at varying degrees," said Scott Silverstein, senior managing director for Charles Dunn's sales and leasing division.

In the East Valley, the average asking monthly rent for class-A properties rose to $2.29 per square foot, up from $1.99 per square foot in the second quarter. The average rate in the West Valley rose to $2.31 per square foot, from $2.24 in the prior period, and the rate in the Conejo Valley inched upward to $2.29, up from $2.25 in the second quarter.

In the San Fernando Valley's industrial sector, the vacancy rate continued on a downward trend, reaching 4.9 percent, the lowest level since the third quarter of 1998, said Jim Linn, senior vice president at Grubb & Ellis.

"The vacancy has been as low as it's been for a couple of years," Linn said.

"It's very difficult to find buildings for people today."

Although rents have not surged ahead in the industrial sector as they have for office properties, Lion expects that to change beginning in the fourth quarter.

"We're also seeing that it's getting harder and harder to find buildings for sale," said Lion. "As the supply of buildings goes down, it creates more and more pressure on sale prices and lease rates."

San Fernando Valley

Major Events:

* Alcatel signed a $10 million lease for 200,000 square feet at Investment Development Services Inc.'s Conejo Spectrum.

* Los Angeles County signed a deal for a 164,500-square-foot office building at Chatsworth Business Park for its CalWorks, Medi-Cal and In Home Support Services operations.

* Countrywide Home Loans signed a lease for 140,000 square feet in West Hills Corporate Village.

* The Johnston Group acquired two office buildings in Westlake Village -- at 2659 Townsgate Road and 875 S. Westlake Blvd. -- for $11.9 million.