Tri-Cities Rents Rise as Demand Flattens

 

The market recorded negative absorption for a second consecutive quarter. Vacancy was artificially inflated, as Nickelodeon’s headquarters delivered vacant to the market, but will be fully occupied by the end of 2016. Despite the rise in vacancy, modest leasing activity and a gradual rise in rents still indicates overall confidence in the market. Three of the five submarkets saw increases in rates, leading to a net gain of $0.01 PSF monthly overall.

 

Investment activity stayed steady with 4 major sales occurring, primarily in Pasadena. For investors, sizable discount to replacement cost and rents below peak levels are helping to fuel activity, along with a varied tenant base for the market.

Key Takeaways:

  • The Tri-Cities office market saw vacancy increase from 13.7% to 14.2%, the second increase seen in the last six quarters. Absorption only recorded negative 7,200 SF in third quarter.

  • Rents continued to ascend, landing at an average monthly asking rate of $2.88 per square foot (PSF) Full Service Gross (FSG). Up 3.1% year-over-year, this marks eight straight quarters of increases.

  • Leasing activity in the Tri-Cities recorded 366,100 square feet (SF), down 36.5% from last quarter’s total of 576,600 SF.

  • There was one new construction delivery this quarter, as Nickelodeon’s headquarters facility at 203 W. Olive Ave. in Burbank delivered 113,800 SF fully leased to the Burbank submarket.

  • Investment activity occurred primarily in Pasadena and Burbank, the largest being 245 Los Robles LLC acquiring 245 S. Los Robles Ave. in Pasadena from Kennedy-Wilson Properties for $40.5 million. The 131,000 SF office tower was one of three properties in Pasadena to trade in third quarter.

Outlook:

Going forward, the Tri-Cities market continues to be an attractive market for tenants from a variety of industries. Large blocks of space still remain in some of the core submarkets, such as Pasadena and Burbank, at a price discount relative to other markets in the Greater Los Angeles region. It is expected that the Tri-Cities market will remain relatively insulated against large shifts in the market due to stable tenant demand and a scarcity of new available construction. While the outlook remains positive overall, it should be noted that the Tri-Cities market is not seeing the types of gains in rental rate velocity nor demand it saw in 2015.