San Fernando Valley sees raft of tenant relocations; investigations of quake-damaged structures...

January's shake, rattle and roll damaged millions of square feet of industrial, office, retail and residential properties throughout the San Fernando Valley. Even though several major deals emerged out of the rubble, industry sources said the earthquake has also made the San Fernando Valley real estate market extraordinarily transient - especially since many of the resultant deals were merely temporary relocations.

"The earthquake resulted in a flurry of leasing activity," said Mike Zugsmith, chairman of commercial brokerage firm Zugsmith-Thind Inc. "But now that the flurry has settled down, it's become apparent that most of these were short term. From an earthquake standpoint, it didn't result in the long-term deals we might have been looking for."

The overall office vacancy rate for the San Fernando Valley dropped from 15.8 percent a year ago to 12.8 percent at the end of the first quarter, according to commercial brokerage Grubb & Ellis Co. But as tenants determine their lease obligations, and landlords assess the damage, the San Fernando Valley is likely to experience another flurry of activity.

"It's going to take about another 90 days to see which buildings get repaired. In the next 90 days, we're going to see a lot of legal activity in real estate, as tenants and landlords take at look at their rights and obligations," said Mike Howard, a senior vice president in the Sherman Oaks office of Grubb & Ellis.

According to Grubb & Ellis, the earthquake damaged approximately 1.5 million square feet of office space, including buildings in Encino, Northridge, Panorama City, Sherman Oaks and Woodland Hills.

The biggest earthquake-related office transaction of the quarter accurred when mail-order marketer U.S. Sales Corp. quickly vacated its operations at a "red-tagged" Northridge office park. U.S. Sales then signed two leases, one for approximately 70,000 square feet at the Develcore Center in Encino and the other for about 45,000 square feet at the Encino Terrace Center.

The Motion Picture Association of America and the Alliance of Motion Picture & Television Producers jointly took temporary space at Studio Plaza in Burbank after the 70,000 square feet of space they occupied at the Encino Spectrum building suffered earthquake damage.

And when the approximately 70,000 square feet of space Harmon International occupied at the Harmon International Park in Northridge sustained damage, that company relocated some of its operations to a Chatsworth industrial park - temporarily leasing research-and-development and "flex" space. Flex space is multipurpose commercial space that can be configured for office, distribution, manufacturing, research-and-development or other uses.

One of the biggest San Fernando Valley tenants seeking to relocate from its damaged offices in Warner Center is 20th Century Industries. Earlier in the year, 20th Century, which employs 1,500 people, unexpectedly announced it would not be the anchor tenant in the yet-to-be-built $100 million Warner Ridge project. Industry sources said 20th Century will likely take up occupancy in the 500,000-plus square feet of office space available in the long-vacant Warner Center Plaza III.

The earthquake also caused delays in escrows scheduled to close in February and March. "In the first quarter, our escrows for land, commercial and residential properties all came to a shuttering halt. There weren't many cancellations, but people wanted to reassess because of earthquake damage. Most of the properties suffered minor cosmetic damage and, once we got over those issues, the escrows are closing on a delayed basis," Zugsmith said, adding, "I think we'll see a tremedous spike in sales in the second quarter of 1994 compared to the second quarter of 1993."

Madalyn Seyer, Grubb & Ellis' San Fernando Valley office research director, said she found that most delayed escrow closings occurred in the apartment market.

Bernard Haddigan, a first vice-president at brokerage firm Marcus 7 Millichap Inc., said a lot of lenders are beginning to put their red- or yellow-tagged apartment buildings on the market.

Generally, Haddigan explained, lenders aren't entrepreneurs. They'd rather not hire contractors to repair damages to their foreclosed properties. They feel the repair expenditures would not necessarily yield an equivalent return when the property is sold.

"We're seeing a lot of buyers coming out of the woodwork who think they can buy the buildings cheap, fix them up and turn around and sell them for a profit. But there's a risk involved, especially when you don't hire a structural engineer to survey the property," he added.

The largest number of yellow- or red-tagged apartment buildings can be found in Sherman Oaks, Northridge and Canoga Park, according to Grubb & Ellis. With over 20,000 housing units lost throughout the San Fernando Valley, Haddigan said, "We thought initially the vacancy rates would really tighten up, but that didn't really happen. It seems people either doubled up, moved in with relatives or fled the valley."

Dick Carter, a senior associate with Beitler Commercial Realty Services Inc., said there's about a 25-percent vacancy rate in shop space along Ventura Boulevard. "Ventura Boulevard shops are closing because there are no residents in large blocks of areas. Buildings (apartments and condominiums) are either being demolished, or it will take six to eight months for repairs and retrofitting."

Carter, who specializes in retail transactions, said the Sherman Oaks area was particularly hard hit. "I've been working with tenants who don't want to look in the Sherman Oaks area. Since the earthquake, no one wants to be there because there's no one there to shop. Tenants are taking a wait-and-see attitude," he explained.

But industry sources said the earthquake will only temporarily hamper the growth of the Northridge retail market, which was faring well prior to the 6.8 quake. The Northridge Fashion Center, with its 1.5 million square feet of space, was purchased by Dallas-based MEPC American Properties last December, just weeks before the earthquake. MEPC already had plans to upgrade the 22-year-old shopping center. The center suffered extensive damage when its Bullock's department store collapsed and the roof caved in at J.C. Penney and on a three-story parking structure.

MEPC had insured the mall against earthquake damage and business interruption. And with the additional monies from the Federal Emergency Management Agency, the Northridge Fashion Center will be poised to continue its planned renovations.

"The Northridge Fashion Center will be bigger and better then ever," said Dave Turner, principal of the Northridge-based shopping center consulting firm The Turner Group, "They've got a gold-mine there. They'll be able to get rid of the old leases and bring in better tenants at good rates."

But Turner said retail tenants in the Northridge area may not fare so well. "At a lot of the damaged buildings, landlords are using the damage as a way to get out of their leases so they can raise the rates. There are a lot of tenants who are basically being kicked out. The earthquake gave landlords an opportunity to get FEMA to rebuild the buildings, fix up the space and get better tenants."

Despite such tenant ousters, Turner said there will soon be a waiting list for retail space in the northwest San Fernando Valley. "There's nowhere to go," he said, noting that before the quake the Northridge area already had a 1.26-percent retail vacancy rate.

The Northridge Pavilion, a new mall slated for a spring or summer 1995 opening at the corner of Plummer Street and Shirley Avenue, already has a waiting list of over 400,000 square feet worth of tenants. The project is being developed by Northridge Pavilion Associates, a partnership led by American Diversified Properties. Turner, who is handling leasing for the project, said, "I have an offer from Toys R us, who want to lease over 70,000 square feet, and I can't place them in my center."

Grubb & Ellis brokers estimated that between 4 million and 5 million square feet of industrial space sustained earthquake damage. The major damage occurred in the west valley, especially in Chatsworth. And most heavily affected type of construction was concrete tilt-up buildings.

The major deals included Packard Bell Electronics Inc.'s move from its damaged site in Chatsworth to over 160,000 square feet in Westlake Village and over 120,000 square feet in Camarillo.