Glendale exodus leads to office space oversupply.

As neighbors to the east and west prosper, Glendale's office market continues to be awash in bad news.

Roughly 1 million of the city's nearly 6 million square feet of office buildings are empty and the amount of vacant space is on the rise.

Last month Children's Place Retail Stores Inc., the new owner of Walt Disney Co.'s retail stores, announced it would move the operation to Pasadena, and Nestle USA Inc. has decided to slash about 20 percent of the space it takes in its Glendale headquarters.

Last week, office building magnate Rob Maguire declared Glendale "less strategically significant" to his publicly traded company, Maguire Properties Group Inc., and announced plans to sell its three-tower portfolio in the city.

"This is the most startling condition the market has been in since the late 1970s," said Bill Boyd, a senior vice president at Grubb & Ellis Co.

Comparatively, the leasing market tends to be rosy in Burbank and Pasadena, which along with Glendale make up the so-called Tri-Cities submarket.

Pasadena's office vacancy is in the single-digits, close to levels not seen since the dotcom days and rents have accordingly been on the rise. At the beginning of the year, Pasadena's average asking rates were $2.42 a foot, up 3 percent from the year before, according to Grubb & Ellis.

In Burbank, spurred by growing entertainment firms, vacancy levels have been steadily shrinking and average asking rents have climbed to over $2.60 a foot, higher than rents in tony L.A. markets such as Brentwood and West L.A.

Compounding Glendale's problems is the lack of growth by industries already located in the city, according to Tom Bohlinger, a senior vice president with CB Richard Ellis Inc.

"Each submarket has different industries that drive the markets," said Bohlinger, a onetime Glendale resident. "If you look at the companies that have generally been expanding, they haven't been the companies that are traditionally located in Glendale."

Partly for that reason, Glendale's asking rents and occupancy levels have been flatter than its neighbors and could even edge negative as more space is added to the market.

Frank Campbell, vice president of leasing for Equity Office Properties Trust, which owns 700 N. Brand Blvd., said Glendale suffers from an "unjust" image problem.

"Glendale has had a tendency to be a little more of a back-office location for more traditional service firms," he said. "It's not very flashy."

'Gore point'

Glendale, the third largest city in L.A. County, traditionally has been a strong market, attracting corporate headquarters of Nestle, IHOP Corp., DreamWorks SKG and a large outpost for insurer UnumProvident Corp.

Meanwhile, Pasadena has been known more for its cultural attractions and its Caltech campus than its stock of older office buildings, many of which can't support large tenants.

In Burbank, derided for years by Johnny Carson for lacking a true center and amenities, demand for office space beyond the so-called media district surrounding the studio backlots has only recently taken root.

By contrast, Glendale in the last 10 years has seen huge growth, with absorption of more than 1 million square feet of new office space--mostly in modern high-rises along Brand Boulevard and Central Avenue.

The city has some of the newest high-rise office buildings in the area, a thriving downtown center and a large mixed-use retail project under way by Grove developer and owner Rick Caruso.

So what's gone wrong? Boyd said that after years of being considered one market, the three cities are starting to pull away from each other.

Pasadena has become more aligned with the San Gabriel Valley office market, while Burbank has become more associated with the East San Fernando Valley market.

"That's leaving Glendale somewhat like gore point of these two markets," he said. "These markets seem to be breaking apart and going in their own directions."

(A Gore point is the small triangle of land that separates a freeway and its off-ramp.)

Bohlinger said the differences in performance are a result of the industries located in each town. As investors and venture capitalists have once again begun pouring money into technology startups, for example, Pasadena has benefited from increased demand from new companies stemming out of Caltech and its Jet Propulsion Laboratory.

In Burbank, Bohlinger said entertainment companies such as Warner Music Group have accounted for much of the increased occupancy and demand. Last year, Yahoo Inc. subsidiary Overture announced it would move its headquarters out of Pasadena and into a new $100 million build-to-suit campus near Burbank airport.

"That was because there wasn't enough space anywhere else," Bohlinger said. "There just wasn't enough space in Pasadena."

Bound for rebound?

Tishman Speyer Properties Inc. may be one of the hardest hit in Glendale. Its office building at 101 N. Brand Blvd., which already has one of the highest vacancy rates in the submarket, now has to contend with the Disney Stores vacating 160,000 square feet in the location.

Meanwhile, Nestle has hired CB Richard Ellis to sublet about 100,000 of the 500,000 square feet it currently leases at 800 N. Brand Blvd., a building owned by Wells Real Estate Funds Inc.

"With the sluggishness of the current leasing market there's 45 years worth of office space available in the market," Boyd said.

Still, Bill Flaherty, Maguire's vice president of leasing, believes that with Burbank and Pasadena quickly filling up, companies will be drawn to Glendale locations over the next two years.

Flaherty said that with Maguire spending $185 million for an 800,000-square-foot office park with entitlements for 1.2 million square feet of new construction in San Diego, the company had to sell assets.

Essentially, Flaherty said Maguire is trading its Glendale properties for an increased presence in San Diego, a market with better demand and rents.

"We think Glendale is poised for significant gains in the coming years," Flaherty said. "If we hadn't taken down the San Diego Tech center, Glendale wouldn't be going on the market."

Flaherty said Maguire wants to sell its three Glendale office buildings for a combined price ranging between $325 million and $340 million. Maguire is selling the Glendale Center, a 14-story office building and free-standing retail structure at 611 N. Brand Blvd., and two prominent Glendale properties it's acquiring in the $1.51 billion Commonwealth Partners LLC portfolio purchase: 770 N. Central Ave. and 801 N. Brand Blvd.

Campbell, leasing executive for Equity Office Properties, said his company has no intention of getting out of Glendale. He also believes the city is poised for a significant turnaround.

"Glendale has been slower to respond compared to the more dynamic markets of Pasadena and Burbank," he said. "But tenants are almost out of options in those markets and when that happens they have a tendency to bleed into Glendale. We feel we're well positioned to capture some of that."