Tri-Cities Demand Stays Flat Throughout 2017

The market finished 2017 in a similar state to where it started. Demand was negative 49,000 square feet for the second time in four quarters, and negative 51,600 square feet for the year.. Vacancy rose accordingly due to lack of demand in Burbank, Glendale and Pasadena. Glendale will see vacancy increase substantially by mid-2018 as Nestle USA completes its 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 12th Class A property trade in the last three years. For investors, sizable discount to replacement costs 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 increased at year-end from 13.0% to 13.2%. Absorption was negative, recording 49,000 square feet, driven primarily by Burbank.

  • The average monthly asking rate rose by $0.03 to $3.06 per square foot (PSF) full service gross (FSG). Up 4.7% year-over-year, this marks 13 straight quarters of increases.

  • Leasing activity in the Tri-Cities recorded 253,600 square feet, the majority of which came from Burbank and Pasadena.

  • There were no new construction deliveries this quarter and no new projects under construction.

  • Investment activity tapered in the fourth quarter. After purchasing the property as part of the Equity Office portfolio in 2007, the Blackstone Group sold 700 N. Brand Boulevard for $55.3 million ($260 PSF) to Canadian investment firm Onni Group. They also divested 801 N. Brand Boulevard and 700 N. Central Avenue to CBRE Global Investors for $122 million ($294 PSF).

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 discounted price relative to other markets in the Greater Los Angeles region. However, a lack of larger tenants in the market might mandate dividing those large blocks into smaller spaces. Likewise, those blocks will soften demand from out-of-market tenants.

Vacancy has stagnated of late in the Tri-Cities market, and continued rightsizing and relocations out of market will keep vacancy gains static going forward. While the Tri-Cities market continues to be a destination for tenants in a variety of industries, leasing and demand will flatten out through 2018. Large vacant blocks, like the 300,000 square feet Nestle USA will leave behind in Glendale, will soften gross demand both in the Tri-Cities and the Greater Los Angeles region. Rising rents in the Tri-Cities market are expected to continue through the first half of 2018, though lessened demand might temper gains going forward.