2017 Starts With Negative Demand for Tri-Cities

The market began 2017 with lessened momentum as demand was negative for the third time in four quarters. Vacancy rose in lockstep as Pasadena experienced a sizable relocation/downsize and a tenant’s exit from the market. Glendale will see vacancy jump by midyear due to Nestle USA’s relocation. Strong leasing activity in the core markets of Burbank and Glendale were not enough to prevent a two year low in velocity. Rents continued to rise, however, on the strength of Class A properties. Investment activity was widespread, with Glendale seeing a flurry of activity. 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 to start the year from 13.0% to 13.5%, the third increase in the last 4 quarters. Absorption recorded negative 122,600 SF, with Pasadena being the primary driver.

  • Rents continued to ascend, landing at an average monthly asking rate of $2.96 per square foot (PSF) Full Service Gross (FSG). Up 4.0% year-over-year, this marks eleven straight quarters of increases.

  • Leasing activity in the Tri-Cities recorded a 2-year low of 341,000 square feet (SF), down almost 300,000 SF from last quarter.

  • There were no new construction deliveries this quarter, and there are no new projects currently under construction.

  • Investment activity continued with momentum in the first quarter, particularly in Glendale. The largest transaction was DivcoWest acquiring 655 N. Central Ave. in Glendale from PGIM Real Estate for $179.0 million.

Outlook:

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. A scarcity of new available construction might not be able to counter modest tenant demand. The market was subject to downsizing and relocations out of market this quarter and that trend has the potential to continue going forward.