Tri-Cities office vacancy rate rises a bit; rents drop: quake damage contained to older retail, studio buildings.

The Tri-Cities of Glendale, Pasadena and Burbank suffered a slight rise in office vacancy rates and deteriorating office rental rates in 1993. Nevertheless, the market's softening was only minimal when compared with other markets around Los Angeles County.

Only minimal damage from the Jan. 17 earthquake was reported in the Tri-Cities area. Some older retail structures along Brand Boulevard in Glendale were reported to have suffered quake-related damage, as were parking structures at the Glendale Galleria and the Glendale civic center, according to Bill Boyd, a broker with CB Commercial Real Estate Group Inc.

In fact, the quake may provide a temporary boost to the Tri-Cities office market. Boyd said that a number of government agencies associated with the earthquake relief effort are looking at leasing temporary office space in the Glendale area.

Structures at two different Burbank movie studio lots were reported to have suffered some damages due to the earthquake.

Real estate sources reported that The Walt Disney Co. is hunting down temporary office space in the Tri-Cities area to house employees displaced from earthquake-damaged Disney buildings. Disney spokesman Ken Green said he could not confirm those reports.

Warner Bros., however, did confirm that buildings on its Burbank studio lot were damaged by the quake; although a Warner Bros. spokesman stated that the damage is most likely only cosmetic. Four Warner Bros. sound stages were closed pending further assessment of structural soundness.

Meanwhile, according to brokerage firm Grubb & Ellis Co.'s year-end real estate report, the rising office vacancy rates in the Tri-Cities area are mainly the result of corporate downsizing rather than companies relocating to other places. In fact, Grubb & Ellis predicted the trend will continue in 1994, at least in Pasadena. Several Pasadena banks and engineering firms may be planning to downsize again in the year to come, according to Grubb & Ellis, which may throw even more space on that submarket.

Both Glendale and Pasadena had "negative net absorption" during 1993. Simply, that means more space was vacated than was leased during the year. The Pasadena submarket experienced negative net absorption of 90,000 square feet of office space. The Glendale submarket had negative net absorption of 120,000 square feet.

That caused vacancy rates to rise a bit compared with year-earlier levels. Still, vacancy rates for the three Tri-Cities submarkets were lower than some other local submarkets.

At year's end, the office vacancy rate for Glendale was 15.7 percent and only 12.3 percent for Pasadena. Compared to other Los Angeles County areas, those figures, though high for this market, were not too bad.

For example, downtown Los Angeles and Mid-Wilshire clocked in at 20 percent and 25.5 percent, respectively, at the end of 1993.

Rental rates in both Glendale and Pasadena also declined over the course of 1993. But the rate of decline is slower than in other parts of the county. Both the Glendale and Pasadena submarkets saw about a 5-percent decline in rental rates during 1993, compared with the prior year.

Again, that decline, while significant, was far less than the rate of rental rate decline in downtown L.A. and Mid-Wilshire. In the downtown L.A. market, rental rates declined in every class of property during 1993 by an average of more than 30 percent. Rental rates declined in Mid-Wilshire through 1993 by as much as 7 percent per quarter.

In fact, many brokers in the Tri-Cities area pointed out that the softness of the downtown L.A. market is a factor driving down rental rates in Glendale, Pasadena and Burbank.

"The only thing that will keep rents from going up in the market will be the continued softness of adjacent markets like downtown," said Todd Doney, a broker with Cushman Realty Corp.

Rental rates on comparable buildings in nearby markets, such as downtown L.A., are falling to all-time lows. Landlords in the Tri-Cities, as a result, have been forced to lower their rates to compete.

Doney predicted that demand for Tri-Cities office space will remain stable in 1994 and that "the effect of diminishing supply of office space due to the lack of construction" may drive down vacancy rates a bit.

The office submarket of Burbank saw some interesting activity in the fourth quarter of 1993. The City of Burbank provided economic incentives to lure two new tenants to the area. According to Carl Muhlstein, executive vice president of brokerage firm Wilrock National Inc., the city provided economic packages for both Allianz Insurance Co. and KIIS-FM radio station to move to Burbank. The packages were worth $250,000 for Allianz and $50,000 for KIIS and were calculated in accordance with the economic benefits that the city expects to receive from these tenants.

"The Allianz and KIIS transactions are important because they had no previous presence in Burbank, and they chose to go there," said Muhlstein. Fresh faces in Burbank are unusual, according to Muhlstein, as most of the new space recently occupied in that market has been from expansion of existing tenants. For example, the Walt Disney Co. and its subsidiaries have been expanding their presence in the Burbank area, as has Rysher TPE, a television distribution company.

The City of Burbank has come to realize that the studios' expansion plans "on campus" are bound to leave huge vacancies in Burbank Media District office towers that are not situated on studio lots. And the city also realized that it could take steps to entice new tenants to the area. Warner Bros., for example, plans to vacate several hundred thousand square feet of office space in The Tower, an office building on Alameda Avenue in Burbank, when it starts moving into its expanded studio space on the Warner Bros. studio lot nearby.

In fact, most of the movement in the Tri-Cities area is coming from within the market, said Boyd. "Growth in the Tri-Cities market was achieved from tenants moving from other markets throughout the '80s," said Boyd. "In the last two years, most of the movement and growth has come from within the market."

Evidence of this continuing trend, said Boyd, is the letter of intent recently signed by a Tri-Cities-based financial institution planning to move its headquarters to 700 N. Central Ave. in Glendale.

Other significant moves within the Tri-Cities market, according to Boyd, include the Home Insurance Co. expansion and relocation of its space in Glendale. It moved its local offices from 505 N. Brand Blvd. to 801 N. Brand Blvd. in December and expanded from 12,000 to 20,000 square feet at its new location. Liberty Mutual Insurance Co. is also expanding in Glendale at the Glendale City Center. It plans to expand to 29,000 square feet from 13,000 square feet. Also at Glendale City Center, PageNet recently signed a lease and plans to move in January 1994 from Burbank. It is taking 20,000 square feet in Glendale.