Tri-Cities Rents Slide While Vacancy Rises
The market began 2018 similarly to how it ended 2017. Demand was negative 148,600 square feet, fueled by a lack of demand in the western Tri-Cities submarkets. Glendale continued to see its vacancy increase substantially as Nestle USA continued relocating to Virginia. Rents decreased for the first time in five years, a signal of some possible cooling, especially in the Class A tier. Investment activity was concentrated in Pasadena, Burbank and Glendale. Glendale saw its fifteenth 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.
The overall vacancy rate rose 70 basis points to 13.9%. Three out of the five submarkets in the Tri-Cities saw increased vacancy. Glendale, which saw the largest gains, jumped by 180 basis points. Year over year, vacancy in the Tri-Cities has remained relatively flat, with only minor fluctuations in the interim. Absorption in the Tri-Cities registered the second quarter of negative demand in the last four quarters. Among the major demand drivers was Nestle’s continued move out of Glendale. After vacating two floors at 800 N. Brand Boulevard last quarter, half of its remaining square footage went dark this quarter with the balance to follow by mid-year. Pasadena posted 69,400 square feet of demand, mostly on the strength of mid-to-small tenants. Average asking rent growth decreased to 2.9% year-over-year, after posting a rate of 4.7% last quarter. Construction remains non-existent in the Tri-Cities market, as no properties are currently under construction. Investment activity for properties over 25,000 square feet surpassed sales volume from last quarter, with four transaction recording $289.6 million.
- Overall vacancy in the Tri-Cities office market increased from 13.2% to 13.9% to start the year. Absorption was negative for two consecutive quarters, recording 148,600 square feet, driven primarily by give-backs in Glendale and Burbank
- The average monthly asking rate wavered for the first time in 14 quarters, decreasing by $0.01 to $3.05 per square foot (PSF) full service gross (FSG).
- Leasing activity in the Tri-Cities recorded 339,200 square feet, the majority of which came from Burbank and Glendale.
- There were no new construction deliveries this quarter, and no new projects broker ground.
- Investment activity surpassed the fourth quarter of 2017 in transactional value. After a deal at 150 N. Orange Grove Avenue fell through last quarter, ACCO Engineered Systems bought 888 E. Walnut Street for $112 million, or $477 PSF. The company will occupy a majority of the property’s 234,900 square feet. In addition, Intercontinental Real Estate made a $123.5 million play ($370 PSF) for the 91%-leased Connexion Burbank campus.
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. Smaller, but more numerous, transactions will dominate activity in some markets, such as Pasadena. Production office demand in Burbank continues to be intense. Rents in the Tri-Cities market are expected to flatten through 2018. Construction will be scarce for the near future as several projects remain in proposed status throughout the Tri-Cities market. Minimal federal interest rate increases should help keep investment activity steady through early 2018.
The Tri-Cities market continues to be an attractive market for tenants from a variety of industries. Large blocks of space 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 prospective tenants might mandate the dividing of those larger blocks to answer shifting tenant space demands and maintain velocity. Likewise, those blocks will soften demand from out-of-market tenants.