Lack of construction helps San Fernando Valley market to firm.

Slow-but-steady leasing and a lack of new construction are gradually whittling away the inventory of available office space in the San Fernando Valley.

Meanwhile, sales of apartment buildings remained one of the most active segments of income-producing properties in the San Fernando Valley during the third quarter, as lenders continued to unload repossessed apartments and more private sellers put their buildings on the block.

Seth Dudley, a vice president at commercial brokerage firm Julien J. Studley Inc., said that, even though the amount of office space leased year-to-date in the valley is less than last year, the valley's overall office vacancy rate has declined since last year because of the lack of new construction.

As of Aug. 31, Studley reported a year-to-date total of 2,060,077 square feet leased in the valley -- 4 percent less than the 2,143,700 square feet leased at that point in 1992.

Dudley reported 520,602 square feet leased during July and August, compared with 606,360 during the May-June reporting period and 588,874 during July and August last year.

The valley's office vacancy rate stood at 19.2 percent as of the end of August, up slightly from 19.1 percent at the end of June but down from 23.6 percent at the end of August 1992.

The lack of new construction in the valley is a result of the recession, as well as anti-growth forces that have had what Dudley called "an interesting effect" on development plans for two prime commercial sites along Ventura Boulevard.

Several years ago, he said, anti-growth forces quashed a plan to tear down an existing structure and build three high-rise office buildings of between 10 and 13 stories each at the northeast corner of Topanga Canyon and Ventura boulevards, near Warner Center.

"Meanwhile, real estate values declined and financing for commercial construction became nearly impossible to obtain. As a result, new plans for the site involve rehabilitating the existing retail center and adding a supermarket," Dudley said. Nearby homeowners continue to object to the project despite the substantial downsizing of it, he added.

Similar circumstances surround another commercial site on Ventura Boulevard, between Gaviota and Gloria streets. According to Dudley, development plans in the 1980s involved tearing down an old bowling alley on the site and constructing a high-end two-story retail center. Objecting to projected retail traffic and plans for the retail center to contain a theater, homeowners and anti-development forces successfully delayed the project. Meanwhile, changing economic conditions are such that "the only economically viable project for the site is the rehabilitation of the old bowling alley for a discount appliance store," Dudley said.

Despite these stalled projects, there is still plenty of office space available in the valley.

According Vice President John Gebhardt of the Voit Cos., which developed and manages much of Warner Center, a lease signed by The Federal Home Loan Mortgage Corp. (Freddie Mac) illustrates the changing nature of competition in the Los Angeles office leasing market.

Gebhardt said Freddie Mac, which leased 36,000 square feet at Voit's Warner Center Plaza VI tower, was considering office space at a number of L.A. area locations before choosing Warner Center.

"Our chief competition for the Freddie Mac lease, as it was coming into the final round, was the Water Garden in Santa Monica. That shows you that people today are looking all over the place, and that they can find space that meets their needs in a number of markets," Gebhardt said.

Besides the Freddie Mac lease, Gebhardt said other Voit leases during the third quarter included El Camino Resources Inc., which took 22,000 square feet at 21011 Warner Center Lane; L.A. Fitness Center, which leased 18,830 square feet at 20971 Burbank Blvd.; and Silgan Containers, which took 16,000 square feet at Warner Center Plaza V.

Gebhardt said the Freddie Mac lease helped to bring Warner Center Plaza VI up to more than 83 percent leased. But Voit still yet to find a single tenant for its never-occupied Warner Center Plaza III -- a 25-story, 591,500-square-foot tower that was completed in 1991. Gebhardt said Voit is close to signing two ground-floor leases at Warner Center Plaza III for a total of 15,000 square feet.

According to Mike Zugsmith of commercial brokerage firm Zugsmith-Thind Inc., conditions are stabilizing in all segments of the valley's commercial leasing market.

"Whether it's office, industrial or retail, we've observed the market stabilizing this year with regard to rental rates," Zugsmith said. "We're really not seeing any more of the deterioration in rates that we had over the past several years. At the same time, we're seeing slow but continued absorption."

On the other hand, Zugsmith said, he doesn't expect rents to increase in the near future.

"We don't think there will be any bounce back in the market. We think there will be gradual increases over time. We think the rates today are closer to reflecting the true market value of rents, whereas in the past they were actually inflated values," Zugsmith said.

Zugsmith noted one of the most active segments of his business has been sales of apartment buildings.

"The market is very vibrant. But again, the prices are relatively low compared to what they were a few years ago."

"The sales prices of apartment buildings today reflect market rental rates and positive cash flows for buyers. Realistically, that's how property should sell -- the old way," he said. By comparison, apartment sale prices were formerly inflated by buyers' anticipation of robust future price appreciation.

Katherine L. Bergh, who specializes in apartment building sales at the San Fernando Valley office of commercial brokerage firm Grubb & Ellis Co., said the valley has become an active market for apartment building sales because it has a high concentration of foreclosed real estate owned by banks, savings and loans and other lenders.

Bergh said most of the valley REO transactions have been buildings of 25 to 30 units, but she said more smaller apartment buildings have been going into foreclosure in recent months.

"We're seeing more of the five- and 10-unit buildings going back to the banks," Bergh said. "I'm not sure why it has taken so long for this to happen. It might just be that the smaller owners feel closer to their buildings and are more directly involved with managing them, so they tried to hold onto the buildings a little longer."