Vacancy Rate Shrinks Amid Slew of Small Lease Deals.

WITH slow-growth sentiment rising and strong tenant demand persisting, the Tri-Cities office market is getting tighter.

The cities of Burbank, Glendale and Pasadena saw their combined office vacancy rate drop to 7.5 percent in the third quarter, down from 8.5 percent in the second quarter, according to Grubb & Ellis Co.

The decline was due to steep vacancy drops in both Burbank and Pasadena, while Glendale softened up a bit during the quarter.

Burbank's office vacancy rate plummeted to 2.8 percent, down from 7.3 percent in the second quarter. Net absorption was 99,259 square feet. With just 3.6 million square feet of rentable space, Burbank's vacancy rate shifts more dramatically than the rates in other areas.

In Pasadena, net absorption was 106,749 square feet, with a vacancy rate of 4.3 percent in the third quarter, down from 6.1 percent in the second quarter.

Meanwhile, Glendale performed poorly in the quarter, posting a negative net absorption of 110,300 square feet, with vacancy rising to 13.6 percent, up from 11.7 percent in the second quarter.

Paul Stockwell, corporate managing director with brokerage Julien J. Studley Inc., blamed the third-quarter rise in the Glendale vacancy rate on companies moving out of old space and into new space.

"I don't believe it's a big trend," Stockwell said. "It's a matter of the market settling out with the new buildings finished."

In the last year, Glendale has absorbed more than I million square feet of new space, which points to the market's strength, Stockwell said.

A far greater indicator of the market's strength was the deal struck earlier this month in which J.P. Morgan Investment Management Inc. agreed to buy the Glendale Plaza office tower at 655 N. Central Ave. for $260 per square foot. It is believed to be a record per-square-foot price for Glendale. Selling the 533,000-square-foot tower is a partnership between Morgan Stanley Real Estate Fund II and PacTen Partners.

Despite such bullish indications, the thirdquarter Tri-Cities lease deals were all relatively small, with even the most significant ones being under 100,000 square feet.

Union Bank leased 30,000 square feet at Glendale Plaza, making that high-rise 100 percent full. (Glendale Plaza had initially struggled to find office tenants when it opened in April 1999.) Nearby, IHOP Corp. leased an additional 40,000 square feet of space at 450 N. Brand Blvd., bringing its total space at the building to 107,000 square feet.

In Burbank, Liberty Libel signed a lease for 20,000 square feet at the NI. David Paul & Associates Media Studios North project, which is expected to be completed in the first quarter of 2001.

"Overall, the market is, in my opinion, very strong despite over 1.2 million square feet delivered of new product and renovations over the past two years," said Doug Marlow, senior vice president with CB Richard Ellis.

The majority of absorption has been and will continue to be by tenants outside entertainment industry, Marlow predicted. Much of the new leasing activity has been by health care and technology firms.

Marlow said he expects a slowdown in the development of new space in the cities of Glendale and Pasadena in the coming years because of a slow-growth movement in those cities. But Burbank is expected to see continued growth.

"Burbank is more bullish on growth," Marlow said. "As we move forward, there will be a limited amount of projects in Glendale and Pasadena."

Marlow expects the slow-growth sentiment to result in higher rents at existing buildings in those cities.

"All in all, I'm bullish on the market," he said. "We're continuing to see upward pressure on the rent."

Actually, the average monthly asking rent in the Tri-Cities market was flat at $2.63 a square foot for the third quarter, off a penny from $2.64 in the second quarter.

In Burbank, there was little new activity. With the vacancy rate below 3 percent and no new developments coming onto the market until early next year, brokers expect the leasing activity to stay quiet in the fourth quarter.

"When you have a vacancy rate of 3 percent there's nothing to lease," Stockwell said.

Two new big mixed-use projects are expected to be finished in Burbank in early 2001.

They are the Lockheed Martin Burbank Empire Center, a mixed-use project between Buena Vista Street and Empire Avenue, and M. David Paul's Media Studios North office campus.

But until those projects are complete, the tight Burbank market is forcing some tenants to look westward toward Universal City or North Hollywood, Stockwell said.

In Pasadena, construction continued on an office project at 1055 E. Colorado Blvd., where biotech company Paracel Corp. pre-leased 80,000 square feet. That development is expected to be completed in April 2001.

Tri-Cities

Major Events:

* IndyMac Bancorp Inc. signed a 10-year ease.

* J.P. Morgan Investment Management Inc. agreed to buy Glendale Plaza for about $135 million.

* Union Bank leased 30,000 square feet in Glendale Plaza.

* IHOP Corp. leased an additional 40,000 square feet in Glendale at 450 N. Brand Blvd., bringing its total space at that building to 107,000 square feet.

* Liberty Libel signed a lease for 20,000 square feet of space at M. David Paul's Media Studios North.

* Burbank Empire Center and Media Studios North progress toward their early-2001 completion date.