Strong Sales Persist to Start Second Half

The market pushed into the second half of 2017 with some momentum as demand was positive for the third time in four quarters. Vacancy slid accordingly due to demand in Burbank, especially for Class A properties. Glendale will see vacancy jump by mid-2018 due to Nestle USA’s relocation. Because of this relocation and others in Pasadena, sublease inventory will increase as tenants begin to vacate. Rents have continued to rise on the strength of Class A properties.

Investment activity was concentrated in Pasadena and Glendale. Glendale saw its eleventh Class A property trade in the last three years. 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:

  • Overall vacancy in the Tri-Cities office market decreased in the third quarter from 13.3% to 13.0%. Absorption was postivitive, recording 59,000 square feet (SF) driven primarily by Burbank.

  • The average monthly asking rate rose by $0.04 to $3.03 per square foot (PSF) full service gross (FSG). Up 5.1% year-over-year, this marks twelve straight quarters of increases.

  • Leasing activity in the Tri-Cities recorded 438,000 SF, up almost 55,000 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 third quarter. After purchasing it for $81.0 million ($256 PSF) and making close to $24.0 million in capital improvements, Saunders Property Company sold 177 E. Colorado Blvd. for $161.5 million ($512 PSF) to Boston-based Rockpoint Group.

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. However, a lack of larger tenants in the market might mandate the demising of those large blocks to smaller spaces. The scarcity of new available construction might not be able to counter modest tenant demand.