Smaller Deals Dominate as Market Girds for More Space

By CONOR DOUGHERTY
Staff Reporter

The Tri-Cities real estate market has gone from bad to worse in the last three months, and with scads of space set to come on the market, things could get rougher still.

Vacancy rates in the first quarter of 2002 jumped to 12.5 percent, from 10.9 percent in the fourth quarter of 2001, according to Grubb & Ellis Co. The year-earlier first quarter had vacancies at 10 percent.

"The amount of sublease space in the market is distracting those tenants that would have historically looked at direct office space opportunities," said Bill Boyd, a senior vice president at Grubb & Ellis.

Boyd also expressed concern about the more than 1 million square feet under construction and nearing completion, all of it in Burbank.

When that space hits the market, it will boost Burbank's gross inventory by 25 percent, to 5.1 million square feet. With the vacancy rate already at 13.7 percent, the addition of so much space which is not pre-leased has brokers worried.

"The market has never experienced that much vacancy in Burbank, not in the last 20 years at least," Boyd said.

Taken as a whole, the Tri-Cities market recorded negative net absorption in the first quarter of 155,934 square feet (meaning more space came onto the market than off), compared with negative 28,766 square feet in the fourth quarter of 2001. Though the prospect of all that space coming on line is worrisome for area brokers, Burbank nevertheless recorded positive absorption of 35,207 square feet in the first quarter.

Pasadena did not fare as well. The bulk of Tri-Cities negative net absorption nearly 150,000 feet came onto the market in Pasadena.

Shifting dynamic

Brokers in Burbank, Glendale and Pasadena, who have been living with the slowdown for at least two quarters, said rental rates are finally starting to decline. Monthly asking rents in the submarket fell two cents, to $2.49 in the first quarter. A year ago tenants were paying $2.44.

Besides lowering rents, Boyd said landlords are being forced to offer up a little extra to tenants, who hold the bargaining power.

He said concessions are deal specific, but usually on the order of a few months' free rent and two years or more free parking.

On the sublease front, Boyd said the market has been distracted by Baxter Health Care, which is subleasing 70,000 square feet at 550 Brand Blvd. in Glendale. The space was renting for $1.80 per foot per month, compared with comparable direct lease space of $2.50 to $2.60 per foot per month.

In addition to Baxter, Fremont Insurance is subleasing about 100,000 square feet at 550 Brand.

"You've got two big subleases in Glendale," said Paul Stockwell, a managing director at Julien J. Studley Inc. "That doesn't help." Still, Stockwell said the type of sublease space being offered is only suitable for certain clients and has minimal appeal regardless of price.

As a result, smaller deals have dominated the market.

DIC Entertainment signed a three-year lease for 26,000 square feet at 4100 Alameda Ave. in Burbank. Market sources estimate the aggregate lease value at $2.4 million. Also in Burbank, Bechtel Corp. leased 7,500 square feet for two years at 601 S. Glenoaks Blvd.

The Gallery Office Tower, at 100 W. Broadway in Glendale, had some relocation success in the first quarter. It lured Franscell Strickland Roberts & Lawrence to 8,000 square feet in a 10-year, $2 million dollar deal. The firm relocated from Pasadena. Baker, Olson LeCroix & Danielian signed a $750,000 deal for a five-year, 6,000 square foot Gallery Office Tower lease.

Brokers are hoping that rather than boost vacancies, the new product coming on line in Burbank will lure more tenants.

"I expect to see activity pick up in the second and third quarters of 2002," said Stockwell. "Before, there was a bunch of dirt and holes in the ground. It's tough to get tenants excited about that."

Sources said Warner Music is on the brink of signing a deal for 200,000 square feet at the Pinnacle Development in Burbank. And several brokers have said that their phones are starting to ring a bit more. "We are seeing tour activity pick up and usually that's an indicator of when deals are going to get done," Stockwell said.

Despite the current doldrums, there was a new project announced for Pasadena, scheduled to be completed in December 2004. Investment Development announced it would build Crown City Center, a six-story, 223,000 square foot office building at 203 N. Lake Ave.

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