Absorption dives as effect of overbuilding dogs market. (Real Estate Quarterly--Tri-Cities).

THE sluggish economy continued to take its toll on the Tri-Cities market during the fourth quarter, closing out a year that saw vacancy rates soar as asking rents dipped. A flurry of year-end negotiating, however, offered some hope that a market shift was nearing.

Vacancy figures for the Burbank, Pasadena and Glendale areas inched up to 15.5 percent, a nominal 0.7 percent increase over the third quarter but a nearly 50 percent gain over the fourth quarter of 2001, according to Grub & Ellis Co.

Net absorption through the quarter stayed in the red, as 118,227 more square feet came on the market than were taken off. Not helping matters was a huge chunk of new space coming on line, particularly in the Burbank submarket, which added nearly 800,000 square feet in the last year.

"It's pretty much status quo," said Bill Boyd, vice president at Grub & Ellis. "The market continues to hemorrhage with negative absorption."

At the close of fourth quarter 2001, average asking rents were $2.51 per foot for Class-A space in a market that sported a vacancy rate of 10.9 percent. But during 2002, as lots of new product came on line, landlords struggled with vacancies that climbed as high as 21.8 percent.

In response, rents have eased 10 cents from year-end 2001, although the pace of decline slowed in the fourth quarter, when they were down a penny per foot, to $2.40, from the third quarter.

"For the past 20 years, at least, effective rents have never dropped from the previous year," said Boyd, who attributes the situation to the vast amount of available sublease space.

More than 250,000 square feet of sublease space came on the market in Glendale, while Burbank and Pasadena followed with 175,000 square feet and 100,000 square feet respectively.

"It's a dramatic problem for landlords who have to compete against sublease space and lower rents," said Boyd who added that sublease asking rents range from $1.50-$1.75 per square foot.

Signs of hope

Despite grim year-end figures, the fourth quarter sustained only marginal dip from the previous quarter, providing a glimmer of hope that the market may stabilizing.

Another turnaround sign: a number of large tenants hunting for space. While Glendale companies like Fremont Insurance and Baxter Healthcare retracted their space, Clear Channel Communications, Unum Insurance, Entre Vision and Warner Bros. were in the market, looking to expand.

"Activity has definitely picked up and there are some big deals in the works that haven't been signed yet," said Shaun Stiles, senior vice president with Colliers Seeley International.

Nico Vilgiate, a director at Insignia/ESG, cited Clear Channel's early first quarter 2003 deal as a promising example. The San Antonio-based communications company capped fourth quarter negotiations when it signed a deal to consolidate its eight Los Angeles-area radio stations with a 95,000-square-foot lease in M. David Paul Associates' Pinnacle project at 3300W. Olive Ave. in Burbank.

Burbank, Vilgiate added, "has always been a desirable market for entertainment companies looking to consolidate given its proximity to studios, and now that there's more space available, tenant demand should increase."

In Glendale, things were quieter. The bulk of the fourth quarter market activity was limited to a handful of smaller deals, although some larger transactions are in the works said Stiles.

The biggest deal of the quarter was the sale of the building that houses Nestles' U.S. headquarters for $157 million--a significant deal because it was the first time any major office building in the Tri-Cities area was traded for more than $300 per square foot. The 20-story office building at 800 N. Brand Blvd. is the latest acquisition of Atlanta-based Wells Real Estate Funds.

Fourth quarter asking rents in Glendale were flat from third quarter levels, at $2.37 per foot. While no new space was under construction in the fourth quarter, net absorption nevertheless increased to more than 63,000 from 11,000 in the third quarter.

Pasadena, tightest of the Tri-Cities markets with a vacancy rate of 12.8 percent, continued to tap development opportunities, leading the market with more than 321,000 square feet under construction. Taking the nearly-completed Constellation Place in Century City out of the equation, Pasadena had the greatest amount of office space under construction in the county.

Earlier in the year, Maguire Partners began construction on the Western Asset Plaza. Western Asset Management has pre-leased 155,000 square feet of the 250,000 square foot project slated for completion in January 2004.

Development continued in the fourth quarter as Champion Development broke ground on a mixed use, 70,000 square foot, four-story building at 175 S. Lake Ave. The $45 million mixed-use offices retail and residential project is expected to be finished in fourth quarter of this year.

"It's rare in this market to break ground without pre-lease agreements," said Stiles, "But Pasadena's strong market base and consistent activity makes it more attractive."

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RELATED ARTICLE: Major Events:

* Douglas Emmett sold the 20-story, 502,000 square foot Nestle USA Headquarters building at 800 N. Brand Blvd. in Glendale to Wells Real Estate Investment Trust for a reported $157 million.

* Champion Development has broken ground on Pasadena Collection at 175 S. Lake Ave., a 70,000 square mixed-used project.

* Community Bank inked a lease at 790 E. Colorado Blvd. in Pasadena, for 26,000 square feet.

* Clear Channel Communications was negotiating for 95,000 square feet to consolidate its eight Los Angeles-area radio stations. By the end of the year it had narrowed the search to M. David Paul Associates' Pinnacle project at 3300 W. Olive Ave.