Flood of New Project Space Presents Problems for Cities

By CONOR DOUGHERTY

Staff Reporter

Facing an economic downturn and a slew of new space set to come on the market in the next six months, vacancy rates in the Glendale, Burbank, Pasadena market could jump by as much as three percent by mid-year, according to several real estate sources.

First indications of a slowdown came at the end of 2001. Vacancy rates in the Tri Cities hit 11.7 percent at the end of the fourth quarter, up from 10.8 percent at the end of the third quarter and 7.6 percent a year ago, according to Grubb & Ellis Co.

The submarket as a whole recorded negative net absorption of 34,500 square feet (meaning more space came onto the market than off), compared with positive absorption of more than 140,000 in the third quarter. Burbank continued to lead the flood of space back into the market, adding more than 77,000 square feet back into the pool.

If there was a bright spot, it was in Pasadena, where net absorption topped 50,000 square feet and the vacancy rate stayed below 10 percent.

Not enough sublease space

Despite the broader lack of leasing activity, rental rates in the Tri Cities managed to climb. Class A asking rent was $2.51 per square foot, up from $2.33 in the third quarter and $2.47 a year ago.

Bill Boyd, a senior vice president at Grubb & Ellis, said the increase in asking rent was due in part to the amount of sub-lease space available. “There wasn’t enough to lower direct rental rates,” he said.

In broad terms, the fourth quarter could be viewed as a partial success. After all, the vacancy rate increased less than a point while asking rents jumped nearly 20 cents a square foot.

It was still only a partial success, though. Only one lease of any significance was signed in the quarter 20,000 square feet at 2255 N. Ontario St. in Burbank, leased to manufacturing firm Barth & Dreyfuss for its corporate headquarters.

Even Mark Monaghan of Grubb & Ellis Co., who brokered the deal with partner Bart Pucci, described the deal as unusual.

Landlord M. David Paul Development ended up buying out the lease of the exiting tenant, an IBM Corp. subsidiary that ceased domestic operations. This cleared the way for a 7-year direct lease with Barth & Dreyfuss, which is said to be moving in this month.

“The landlord is getting a more than fair market rate, (the tenant) was relieved of any future lease obligations and Barth got a very aggressive rental rate,” Monaghan said. Monaghan also said the company was seeking an additional 5,000 square feet in Burbank.

With the exception of that transaction, the Tri Cities fourth quarter was limited to deals of between 2,000 and 20,000 square feet, many of them sub-leases.

So now, brokers prepare for more than 700,000 square feet 4 percent of the existing market set to come on line in the next few months.

Lots of spec space

At present, M. David Paul’s Pinnacle development at 3400 West Olive Ave. in Burbank will be completed in the second quarter. That property, for which no major leases have been announced, will contribute about 585,000 square feet to the market.

And the Burbank Empire Center, developed by Menlo Equities and scheduled for completion in April, will add another 129,500 square feet.

Nico Vilgiate, a director at Insignia/ESG, said no major leases have been signed at the Empire Center, but that there has been some interest. “As the building takes on shape we think activity will increase,” he said.

Trammell Crow Co.’s 155,000 square foot Airport Plaza office building at 2940 N. Hollywood Way may serve as an indicator of where the market is heading. The building was completed last quarter but has yet to see a tenant move in.

That vacancy rates in the Tri Cities will increase is almost certain. The question is only how much. Boyd said he wouldn’t be surprised to see the rate jump as much as 3 percent to 14.7 percent, with leasing activity picking up in the second half of the year.

While he had a sunnier outlook, Vilgiate agreed. “(Vacancy) will definitely increase simply because we are adding supply,” he said. “However, I think the future bodes well for the third and fourth quarters.”

Boyd characterized a vacancy rate in the teens as “average”; anything above 15 percent as “soft.”

If the recent past is any guide, the situation may not be as bad as it may seem. Most buildings in the area have been built on speculation, opening up less than 20 percent leased but filling up within 18 months. That, of course, took place in a more robust economy.

Major Events:

– 20,000 square feet at 2255 N. Ontario St. in Burbank were leased to manufacturing firm Barth & Dreyfuss for its corporate headquarters.

– Construction was completed on Trammell Crow’s 155,000 square foot Airport Plaza office building at 2940 N. Hollywood Way.

– AEW Investments acquired the 100,000-square-foot building at 350 W. Colorado Blvd. in Pasadena.

– Construction of the Pinnacle Development at 3400 W. Olive Ave. in Burbank continues with no major leases announced for the 585,000-square-foot project.