A 32-story tower in the heart of Burbank’s media district – the tallest office building in its market – is expected to trade hands this week in a deal many consider a steal.
Worthe Real Estate Group was under contract to buy Tower Burbank, a Class A office building at 3900 W. Alameda Ave., for $109 million, according to sources familiar with the deal. That’s a considerable discount to the $167 million New York asset management firm BlackRock Inc. paid for the building in 2005.
The steep markdown comes as the 487,000-square-foot building, once more than 95 percent occupied by Burbank entertainment giant Walt Disney Co., was completely vacant but for a 5,000-square-foot Union Bank Inc. branch on the ground floor.
The purchase, expected to close March 17, will further cement Santa Monica-based Worthe’s hold over the Burbank office market, where it already owns approximately 3.8 million square feet across 14 properties, including Burbank Studios, a 982,000-square-foot media campus leased to NBC Universal for production of “Access Hollywood”; “Days of Our Lives”; and, until Jimmy Fallon brought the show to New York last month, “The Tonight Show.”
Including Tower Burbank, Worthe now controls nearly 60 percent of Burbank’s 7.3 million-square-foot office market, an advantage that could give the group a great deal of leverage in dealing with tenants seeking to be in the market.
Despite that control, Worthe will need to grapple with substantial empty space. Burbank sported a 19.8 percent vacancy rate in the fourth quarter, with an average per-foot asking rent of $3.05 a month, the highest average in the Burbank-Pasadena-Glendale submarket.
Carl Muhlstein, a managing director for Jones Lang LaSalle Inc., said the sale price (not quite $224 a square foot) reflected prospective buyers’ reluctance to take on so much risk in a market that already has a vacancy rate higher than Los Angeles County as a whole. Countywide, Los Angeles had a vacancy rate of 16.9 percent in the fourth quarter, according to data from Jones Lang LaSalle.
“(BlackRock) went through a marketing campaign and the market spoke,” he said. “That’s the price people were willing to take this risk at, and Worthe has a very strong closing track record, so they went with them.”
Worthe, perhaps better known as a developer than buyer, is no stranger to dealing with gaping vacancies. The company’s most recent development project in Burbank, the Pointe, a 485,000-square-foot building on Alameda Avenue completed in 2009, sat largely vacant for several years after it opened. In the last year, however, as the market picked up after the recession, Worthe signed leases for more than 200,000 square feet, which, coupled with earlier activity, brought the project to about 75 percent occupancy.
Jeff Worthe and M. David Paul, the firm’s co-principals, declined to comment on the pending transaction.
In addition to a portfolio that now exceeds 5 million square feet of existing office space, their firm has about 3 million feet in the development pipeline.
A considerable chunk of the 5 million square feet is made up of buildings the company developed itself over the last several decades, including Media Studios North, a campus of five buildings (with four more in the pipeline) on Empire Avenue just east of the Burbank Bob Hope Airport that, upon completion, will total about 1.1 million square feet. The firm also developed the Pinnacle, a two-building project on Olive Avenue, and the Pointe, another two-building project on Alameda.
Disney, one of the first big tenants to sign a lease for Tower Burbank after it was constructed in 1989, moved out about a year ago after a five-year lease renewal it signed in 2008 came to an end. The company, which over the course of two decades grew to take over the building, had reportedly locked in below-market rents for the length of its long-term lease. Rather than face aggressive rate increases by renewing with BlackRock, Disney opted to relocate its staff to its Burbank studio lot at 500 S. Buena Vista St. and to other company-owned properties in Glendale.
After Disney moved out, BlackRock began quietly marketing the building for sale. Speculation began to circulate that a potential buyer might do well to convert the poured-concrete office tower to a residential or hotel use, especially given high office vacancy rates in the area.
But Bill Boyd, a senior managing director for Charles Dunn Co. who did early leasing on the property for its Japanese developer, Kumagai Gumi Co., said that idea likely didn’t go very far with prospective buyers who knew anything about the way the building was constructed.
“At the time, it was the largest poured-in-place poststress concrete office building west of the Mississippi,” he said. “Basically what that means is you have to be very careful cutting holes in the floor for wiring or plumbing. If you hit one of the many steel cables running through it, you’ll buckle the whole floor. It would probably cost too much to convert it to residential.”
In addition, the building, which has relatively small 18,000-square-foot floor plates, is freckled with concrete columns that could make space planning for residential use challenging.
Sources familiar with the building said Worthe has already contracted with interior design firm Unispace, which specializes in creative office design. CBRE Group Inc. is expected to handle leasing for the property.
Muhlstein said it makes sense that Worthe would stick to an office use for the building rather than venture into an asset class it’s less familiar with.
“The vacancy of course will be a challenge, but this building is differentiated from all the other buildings in Burbank,” he said. “There has not been a building to cater to smaller tenants there for a long time, at least not of this quality.”
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