Tri-Cities Static as Rents and Demand Flatten
The Tri-Cities market saw slightly positive demand for the first time in three quarters. Gains in Burbank and Pasadena were canceled out by Nestle’s exit from Glendale. After decreasing last quarter, rents saw no movement in the second quarter. Investment activity was concentrated in Pasadena and Glendale. Glendale saw its 16th Class A property trade in the last three years, while one of Pasadena’s trophy assets traded and will be brought up to market rent levels. 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 fell 10 basis points to 13.4%. Three out of the five submarkets in the Tri-Cities saw decreased vacancy, while vacancy in Glendale and Arcadia ncreased. Glendale, which recorded the largest increase, rose by 250 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 positive—but essentially flat—demand of 9,300 square feet for the quarter. Among the major demand drivers was the culmination of Nestle’s move out of Glendale. After vacating two floors at 800 N. Brand Boulevard in 2017 and half of its remaining square footage last quarter, the remaining space (approximately 113,700 square feet) went dark this quarter. Burbank posted 77,600 square feet of demand, with Stalwart Films’ occupancy of 19,000 square feet at Tower Burbank leading the major move-ins. In the biggest deal of the quarter for the market, Warner Bros. Studios renewed its full-building occupancy of 420,900 square feet at 3400 W. Riverside Drive in Burbank. USC Medical signed for 33,000 square feet at 125 W. Huntington Drive in Arcadia, while Dignity Health agreed to relocate from Pasadena Corporate Center to 27,000 square feet at 330 N. Brand Boulevard in Glendale.
Average asking rental growth decreased to 1.9% year-over-year, after posting a rate of 2.7% last quarter. Burbank and Pasadena continue to be leaders in average asking rate with $3.32 and $3.15 PSF FSG, respectively. After rising every quarter since mid-2013, this marks the second time rents have slid or held during that period. Construction remains non-existent in the Tri-Cities market, as no properties are currently under construction. Lincoln Property Company’s AMLI development is slated to bring approximately 210,000 square feet of office to Pasadena, but a ground breaking date hasn’t been established yet. Investment activity for properties over 25,000 square feet surpassed sales volume from last quarter, with four transactions recording $324.6 million. After acquiring 444 S. Flower Street in Downtown Los Angeles from Hines last year, Coretrust dove into the Tri-Cities market with its purchase of Pasadena Corporate Center for $254 million ($397 PSF). Octane, LLC. acquired 520 N. Central Avenue in Glendale from Long Wharf Capital for $27.5 million, or $279 PSF, while 625 Fair Oaks Avenue in South Pasadena traded from Washington Capital Management to Greenbridge Management for $30.7 million ($332 PSF).
Overall vacancy in the Tri-Cities office market decreased from 13.5% to 13.4% to start the year. Absorption barely broke positive, recording 9,300 square feet, as Nestle’s move-out in Glendale tempered positive demand in Pasadena and Burbank.
The average monthly asking rate held at $3.05 per square foot (PSF) full service gross (FSG) after decreasing last quarter.
Leasing activity in the Tri-Cities recorded 641,500 square feet, the majority of which came from Burbank.
There were no new construction deliveries this quarter, and no new projects broke ground.
Investment activity surpassed the first quarter of 2018 in transaction value. Coretrust Capital Partners completed its acquisition of Pasadena Corporate Center from UBS Realty Investors. The four-building campus was 70% leased at the time of sale and will undergo extensive renovations under the new ownership.
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 large blocks to answer shifting tenant space demands and maintain velocity. 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 may 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 stagnate through 2018. Despite relatively flat vacancy and rents, the Tri-Cities market continues to be attractive to investors looking for both core assets and value-add opportunities.