Tri-Cities Rents Rebound Amidst Negative Demand

Demand in the Tri-Cities market recorded negative for the third time in four quarters. Minimal gains in Monrovia, Arcadia and Burbank were surpassed by losses in Glendale and Pasadena. After last quarter’s inertia, rents managed to climb incrementally in the third quarter. Subleases dominated leasing velocity for the quarter, particularly in Burbank. Investment activity was concentrated in Glendale which saw its 17th Class A property trade in the last three years, while a long time corporate headquarters location in Arcadia sold to a local buyer. 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 climbed 50 basis points to 13.9%. Three out of the five submarkets in the Tri-Cities saw decreased vacancy, while vacancy in Glendale and Pasadena increased. Glendale, which recorded the largest increase, jumped by 190 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 demand of -101,000 square feet for the quarter, marking the third negative quarter year-over-year. Among the major demand drivers was Disney’s giveback of four floors at 611 N. Brand Boulevard in Glendale, although two floors should be occupied by Bank of America by the end of the year. Elsewhere, production company Eikon occupied 20,200 square feet at 2777 N. Ontario Street in Burbank, while enterprise communications firm Everbridge relocated from Glendale to 19,000 square feet at 155 N. Lake Avenue in Pasadena. In the biggest deal of the quarter for the Tri-Cities, Twentieth Century Fox subleased 100,000 square feet from Yahoo at 3333 W. Empire Avenue in Burbank. InvenTV also signed a sublease for 20,000 square feet from Playboy at 3333 W. Empire Avenue. In Monrovia, Woodward HRT leased 7,100 square feet at 181 W. Huntington Drive.

Average asking rental growth decreased to 0.9% year-over-year, after posting a rate of 1.9% last quarter. Burbank and Pasadena continue to be leaders in average asking rate with $3.32 and $3.12 PSF FSG, respectively. Notably, both markets saw rents contract or stagnate. This quarter’s increase marks the first time rents have increased in the last three quarters. 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 fell from last quarter, with four transactions recording $164.3 million. Prior to selling 505 N. Brand Boulevard to Cruzan and Goldman Sachs, Principal Real Estate Investors had bought the property in 2014 for $82.6 million ($258 PSF) and sold it with virtually no change in occupancy. Safeway, the parents company of Vons, sold the latter’s longtime headquarters location at 618 Michillinda Avenue in Arcadia to a private investor for $37.5 million ($140 PSF). 

 

Key Takeaways:

  • Overall vacancy in the Tri-Cities office market rose from 13.4% to 13.9% to start the year. Absorption recorded negative 101,000 square feet due to move-outs in Glendale and a dearth of positive demand elsewhere in the Tri-Cities. 

  • The average monthly asking rate increased incrementally to $3.06 per square foot (PSF) full service gross (FSG) after stagnating last quarter. 

  • Leasing activity in the Tri-Cities recorded 314,400 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 was highlighted by a joint venture of Cruzan and Goldman Sachs purchasing 505 N. Brand Boulevard for $93.5 million ($292 PSF).

Outlook:

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.