Tenants find good deals on rent as vacancies increase. (Real Estate Quarterly -- San Fernando Valley).

OFFICE tenants found good deals on rents in the San Fernando Valley. as space flowed into the market during the fourth quarter.

After a gain of 286,259 square feet the previous quarter, net absorption from October through December dipped to negative 25,975 square feet. (Negative net absorption means that more space came on the market than was leased.)

Vacancies rose to 15.3 percent from 15.1 in the third quarter, according to Grubb & Ellis Co., with few new projects under construction.

"It's not all just real estate. There's a lot of other factors," said Bill Inglis, senior vice president at CB Richard Ellis. "It really has to do with the thing in Iraq, Korea. Are we going to have higher taxes in California? A lot of people are really having second thoughts about trying to expand."

Inglis said 275,000 square feet is available at one 20-story building in Woodland Hills alone. "They're starting to make deals that are extremely attractive. Do you want to be in a high-rise? Now is the time to do it"

Rent averaged $2.19 a square foot for Class-A space, down from $2.28 in the third quarter and $2.33 a year ago. Inglis claimed, however, that the rent actually fell more than 10 percent over the past year once free rent being offered by nervous landlords is considered. Some tenants may have experienced "a 15 or 20 percent drop in overall costs from 2001 in actual rent money spent," he said.

The drop in rent was most evident in the West Valley, falling to $2.26 a square foot in the fourth quarter from $2.49 the previous, three months. The area, which includes Woodland Hills, Northridge, Calabasas and Chatsworth, also posted a $2.49 figure a year ago. Other areas saw little or no change in prices.

Colliers Seeley Senior Vice President John Sabourin attributed the fourth-quarter decline in West Valley rent to a reduction in rates at the 1.3 million-square-foot high-rise portion of the Warner Center Plaza buildings by new owner Douglas Emmett Realty Advisors. Pre-sale asking rates had ventured as high as $3 a square foot, said Sabourin, and were brought down to "$2.25 and up" when Douglas Emmett closed escrow. "It was being reflected in the asking rates across the board because it was such a large chunk of space," he said.

Sabourin doubts rents will drop much further. "There's a preponderance of new owners," he said. "They're willing to be overly aggressive to make sure they're looked at as the go-to landlords. You've got landlords offering broker bonuses of five dollars a square foot."

Varied vacancies

Vacancies fell in some submarkets but rose in others. In the East Valley the rate dropped to 13.7 percent from the previous quarter's 14.3 percent. The West Valley, which is the only area undergoing new construction, saw a tiny rise to 17.2 percent from 17.1 percent.

In the Central Valley, encompassing Van Nuys, Encino and Sherman Oaks, vacancies rose a half-point, to 11.9 percent. "I don't think there was as much pressure to close year-end deals as there was in years past' said Cushman & Wakefield Senior Director Matt Hargrove, whose firm chiefly brokers large leases. He expects no lower rents in 2003 and is looking to the third and fourth quarters for a "noticeable" recovery.

Sabourin said recovery is already underway. "Leases are being signed and contracts are being set up with contractors to build space' he said. "We just broke ground at LNR Warner Center on another 180,000 square foot building, which is 40 percent pre-leased." The project is scheduled to open this fall.

But Grubb & Ellis Vice President Brian Hennessey foresees more reduction in rents as current tenants renew. "A lot of the tenants whose leases are expiring are sitting tight and negotiating hard deals with their existing landlords, which are anxious to hang onto them," he said.

Occupants who signed pricey leases as the market peaked in the late 1990s might be especially eager to lower their costs. "You have to realize that our business usually lags six to 12 months behind the economy in terms of activity," Hennessey said, explaining the continued torpor in the real estate market.

"People are still waiting," he said. "Everybody seems to be speaking optimistically. It's one thing to speak optimistically and another to actually see it."

There was one major sales deal in the fourth quarter. In November, Kearny Real Estate Co. and Morgan Stanley Real Estate Funds bought Warner Center Business Park for a reported $55 to $60 million. The 15-building, 468,889-squarefoot property houses tenants including Alliant Techsystems, Avnet, and University of Phoenix. Kearny officials said new leases totaling 40,000 square feet have been signed since the purchase.

The fourth quarter numbers in the San Fernando Valley were much different from the quarter before when office users were absorbing space nearly as quickly as it came on line.

Some brokers saw record leasing rates in the third quarter, largely due to tenants' preference for state-of-the-art buildings, a trend that dropped off in the fourth quarter.

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RELATED ARTICLE: Major Events:

* Kearny Real Estate Co. and Morgan Stanley Real Estate Founds bought Warner Center Business Park for a reported $55 to $60 million. The 15-building, 468,889-square-foot property houses tenants including Alliant Tech-systems, and University of Phoenix. Kearny says new leases totaling 40,000 square feet have been signed.

* Lennar Partners broke ground at LRN Warner Center on a five-story, 179,000-square-foot building slated for completion this fall. The project is 40 perent per-leased, with ATK Missile Systems Company planning to occupy 74,088 square feet.

* Countrywide Home Loans leased 36,000 square feet at West Hills Corporate Village, a 565,000-square-foot complex owned by Multi-Employer Property Trust.