Pace picks up in Pasadena, but Glendale, Burbank still struggle.

VACANCY rates throughout the Tri-Cities submarket remained virtually unchanged in the second quarter, despite a decline in average asking rates for Class A space.

As a result of the lack of leasing activity, many landlords continued to cannibalize their rents in hopes of attracting those few tenants that may be in the market. The result: competition between buildings results in lower average asking and effective rental rates.

Nowhere is this more evident than in Glendale.

Vacancy rates reached 14.8 percent in the second quarter, compared with 14.6 percent in the previous three months and 13.6 percent for the like period a year earlier, according to Grubb & Ellis Co. Glendale's vacancy rates have been in the 13 percent to 15 percent range since early 2003.

Average asking rates for both Class A and Class B properties in Glendale declined from the first quarter. Class B dropped to $2.07 per square foot from $2.09 in the January-March period, but higher than the $2.02 of a year ago. Class A rates, however, slid steadily in the second quarter 2003, dropping to $2.38 per square foot from $2.46 in the first.

Cannibalizing tenants is only one factor pushing rents down, according to Bill Boyd, managing director and executive vice president of Grubb & Ellis.

"The continuing negative absorption in Glendale and the lack of office tenant requirements in the market has contributed significantly to the rent deflation over the past year," he said.

Armstrong/Robitaille Inc. closed an 18,159-square-foot, five-year deal at 535 N. Brand Blvd. for $2.15 million, the only significant lease of the quarter.

It's not much better in Burbank, where vacancy is up, average asking rates are even or down, and absorption is the highest in the submarket.

Vacancy jumped to 14.8 percent in the second quarter from 12.6 percent in the first. (The year-ago rate was 16.6 percent.)

Second quarter asking rates dropped at Class B properties by 2 cents per square foot sequentially to $1.79 a foot, while Class A held steady at $2.59 per square foot, still the highest in the submarket.

Yet some of the new development isn't faring well. While interest in the central business district remains high, activity at office projects adjacent to Bob Hope Airport (formerly Burbank-Glendale-Pasadena airport) is low.

"The airport submarket continues to struggle with approximately 500,000 square feet of vacant space available," said Doug Marlow, senior vice president with CB Richard Ellis. "Although [it's] the most cost-effective opportunity in the market, tenants continue to prefer the more traditional central business district locations in Burbank and Glendale."

During the second quarter, Deluxe Media Services Inc. expanded its offices by 22,000 square feet and obtained signage rights atop the Burbank Empire Center. The five-year deal, which increases the company's space to 60,000 square feet, is valued at $3 million. Regent Business Centers took 23,777 square feet at 2600 W. Olive Ave. from CarrAmerica for an undisclosed amount.

The market is brisker in Pasadena, which continues to hold lowest vacancy in the submarket. The city closed the second quarter at 8.6 percent, versus 9.3 percent in the first quarter.

Average asking rates for Class A space rose to $2.38 per square foot from $2.36 in the first quarter. Class B asking rates also rose, to $2.12 per square foot from $2.05.

"Pasadena continues to attract a diverse tenant base--engineering, professional services, technology, and mortgage banking--due to its access to a diverse and plentiful labor base, abundance of housing options and its well-known amenity base," Marlow said.

Further evidence of the submarket's strength is a six-story spec office project by Investment Development Services Inc. Crown City Center, a 225,000-square-foot, $55-million Class A development, is located at Lake Avenue and Walnut Street.

Boyd says the additional space won't significantly soften the market. In fact, he said, effective rents in Pasadena may begin increasing over the next six months.

Among the transactions in Pasadena: Liberty Mutual Insurance Co. renewed its lease for 9,784 square feet in the Lake/Corson Building on Lake Avenue. Pacifica Capital Group sold its 50 percent interest in Parkway Plaza, a 31,112-square-foot medical office building at 675 Arroyo Parkway. The buyer, 675 Arroyo Associates, paid $5.8 million for the stake.

Marlow is optimistic. "Tenant activity is increasing and with significant barriers to entry for new office development, the recovery will be swift," he said. "In the three years since 9/11, tenant velocity and net absorption have been negatively impacted. With the war behind us and the economy improving, it appears that corporate users are gradually getting back in the market, thus improving the prognosis for the coming months."

Major Events:

* Armstrong/Robitaille Inc. closed an 18,159-square-foot, five-year deal at 535 N. Brand Blvd. in Glendale for $2.15 million.

* Deluxe Media Services Inc. expanded its offices by 22,000 square feet and obtained signage rights atop the Burbank Empire Center for $3 million.

* Regent Business Centers took 23,777 square feet at 2600 W. Olive Ave. in Burbank.

* Pacifica Capital Group sold its 50 percent interest in Pasadena's Parkway Plaza for $5.8 million.

* Liberty Mutual Insurance Co. renewed 9,784 square feet in the Lake/Corson Building at 301 N. Lake Ave. in Pasadena.