Tri-Cities office market flattens, rents deteriorate.

Burbank retains its distinction as tightest submarket 

The Tri-Cities of Glendale, Burbank and Pasadena remains one of the strongest office markets in Los Angeles County. Nevertheless, rental rates there are deteriorating for the first time since the onset of the recession.

Office vacancy rates in the Tri-Cities were about the same at the end of the third quarter as they were at the end of the second quarter.

According to Bill Boyd, a broker with CB Commercial Real Estate Group Inc., Burbank scored best on the office vacancy front, with only 4 percent of its office space sitting idle. Glendale's office vacancy rate was 12 percent at the end of the third quarter and Pasadena's clocked in at 16 percent, according to CB Commercial.

By comparison, Burbank's vacancy rate was 4.2 percent at the end of the second quarter, Glendale's was 12.56 percent and Pasadena's was 16.48 percent, according to CB Commercial.

Tri-Cities brokers commented that the most noteworthy occurrence in the Tri-Cities market during the third quarter was the continuance of declining rental rates. "Despite no new construction in the Tri-Cities market, rental rates have deteriorated in the last two quarters," said Todd Doney, a broker with Cushman Realty Corp.

Two factors seem to be responsible for driving rental rates down. First, Tri-Cities landlords are getting more aggressive, as the influx of tenants to the Tri-Cities area has slowed down. Second, landlords of buildings in comparable markets nearby have reduced their rents.

"Rents have declined over the past year because absorption has slowed down tremendously," said Boyd. In the recent past, intense tenant interest in the Tri-Cities market kept rental rates there relatively high.

According to Boyd, the Tri-Cities office market peaked between 1988 and 1990, when tenants were snapping up 1 million square feet of new office space each year. Glendale alone averaged 400,000 square feet of office space leased per year during that time. By comparison, Boyd said, Glendale is likely to see 100,000 square feet of office space leased this year.

Boyd also pointed out that the continuing softness in the downtown L.A. office market has forced rents there to their lowest point ever. And those bargain rates in downtown L.A. have translated to increasing competition for landlords in the Tri-Cities area.

Tenants can use bargain asking rents in downtown L.A. as a bargaining chip to negotiate similar bargains in the Tri-Cities, explained Boyd. "In downtown, they can get $15-to-$18-per-square-foot (annual) rates; whereas, in Glendale, rents have been closer to $21 to $22.50 for comparable space," said Boyd.

Boyd pointed out that much of the activity in the Tri-Cities market has been, and may continue to be, movement within and among the three cities. One recent example of this movement is Willis Corroon Corp., an L.A.-based insurance company, which signed a lease in the third quarter for nearly 30,000 square feet of space in Glendale. Willis Corroon has been leasing space in Pasadena and is scheduled to make the jump to Glendale in November.

Also indicative of that trend is Altium's move from one location in Burbank to another. The former Lockheed Corp. subsidiary signed a five-year lease in July for 90,000 square feet at 2130 N. Hollywood Way in Burbank. It had previously been leasing space on Buena Vista Street in Burbank.

Tenants from outside the Tri-Cities area have also continued to express interest in the area, although that interest has cooled somewhat from what it was a few years ago. Allianz Insurance Co., for example, recently signed a non-binding letter of intent to lease about 100,000 square feet at the Studio Plaza building at 4100 Riverside Drive in Burbank for 10 years. Allianz plans to attempt to sell the building at 6435 Wilshire Blvd., where its current headquarters are housed.

Allianz's interest in moving to Burbank also demonstrates a diversification of the Tri-Cities' tenant base, said Carl Muhlstein, a broker with Wilrock National Inc. Also planning to move out to the Tri-Cities area next year is KIIS-FM radio station. KIIS recently signed a letter of intent to move to Studio Plaza, according to Muhlstein.

Activity in the Tri-Cities, and especially Burbank, has historically been dominated by entertainment companies -- Warner Bros., The Walt Disney Co., and Sony Pictures Entertainment.

Studio Plaza also made news in the third quarter when it was sold. The 434,000-square-foot building was acquired by Douglas-Emmett Management Co. from the Coca-Cola Co. for $83 million. Studio Plaza's major tenant, Sony Pictures Entertainment, has been gradually phasing out its occupancy of the building and consolidating operations into its studio facility in Culver City.