Media and entertainment goliath Walt Disney Co., which leases 95 percent of the 494,000-square-foot Alameda Tower in Burbank, will be vacating the building this month, relocating its personnel to its Burbank studio lot and to company-owned properties in Glendale.
The move will put 470,000 square feet of office space back on the market – the most to be dumped onto Burbank since it built itself up as an office market about 30 years ago. That could shoot that submarket’s vacancy rate up to 20 percent, a 6 point increase over year-end levels. “Burbank historically has always had the least amount of vacancy of the three Tri-City markets,” said Bill Boyd, senior managing director at Charles Dunn Co. Inc. who brokers deals in Burbank, Glendale and Pasadena, the so-called Tri-Cities. “With the entertainment industry not leasing space at its historic levels, we aren’t sure how quickly this (former Disney) space can be leased.”
The office vacancy rate throughout Los Angeles County was 17.5 percent at the end of 2012’s fourth quarter. The vacancy rate in Burbank was lower at 13.9 percent, according to Jones Lang LaSalle Inc.
The 7.63 million-square-foot Burbank submarket has for decades housed the county’s greatest concentration of movie studios and entertainment companies, including Warner Bros. Entertainment Inc.; NBCUniversal Inc.; and, of course, Disney, which has a nearly 2 million-square-foot headquarters campus at 500 Buena Vista Ave. and occupies thousands more square feet in a variety of buildings around the city.
Disney was one of the earliest tenants in the Alameda Tower, which was built in 1989 and became one of the premier office buildings in Burbank’s Media District. But Disney’s expansion in the building meant property owner BlackRock Inc.
hadn’t had to market the space since it bought the building in 2005. BlackRock’s listing brokers did not return messages.
Michelle Bergman, Disney’s vice president of corporate communications, confirmed the company would vacate the space by the time its lease ended in March, but refused to say specifically where its people would be housed.
She did say the company is moving most of its employees into its Burbank headquarters. Others will go to buildings the company owns in Glendale, though not to the $2 billion Glendale Grand Central Creative Campus it is developing on a 125-acre parcel in the northwest of the city.
The campus is being built in phases and is expected to reach 5.95 million square feet by the time it is built out in 2030. Two phases totaling 588,000 square feet have already been completed and house the headquarters of KABC-TV and a child-care center. Disney has not announced specific plans for filling the campus, but has suggested that as many as 7,000 full-time jobs might be created there.
Bergman declined to say why the company was not moving these offices onto the campus.
While she would not say why Disney decided to leave the building at 3900 Alameda Ave., others pointed out that the move might make financial sense.
Andrew Raines, founding partner at real estate law firm Raines Feldman LLP in Beverly Hills, said companies can better control their occupancy costs by moving into owned real estate. It can also avoid rental rate increases, a likely scenario if Disney were to renew at Alameda Tower. And creative companies like to consolidate employees in campus environments as a way to project company identity and foster collaboration between divisions.
“The bottom line is (costs are) more within their control, and there are efficiencies and intangible qualities of companies and departments being together on a campus setting or studio lot setting that facilitate collaboration,” Raines said. “That’s why Google and Apple have campuses and that’s a material part of creative businesses reinforcing their brands.”
Robin Diedrich, a consumer analyst who follows Disney for Edwards Jones in St. Louis, said Disney was being vigilant in its finances in general.
“As part of a bigger strategy for the company, they’ve paid attention to and done a good job on providing return on capital over the past decade,” she said.
The move is the latest in a string of office relocations for Disney.
It announced last year that it would move its rides operation, a longtime tenant at 5161 Lankershim Blvd. location in North Hollywood, to the Grand Central Creative Campus. Marvel Studios, a unit of Disney, said last year that it would move from Manhattan Beach to company-owned offices near the Glendale campus.
While the other moves have had nominal impacts on the affected submarkets, the repercussions of the Alameda Tower move might be felt for years to come.
In addition to the gross square footage coming back on the market, the 23-year-old building faces structural challenges.
Brokers said the building’s floor plates are speckled with concrete columns, making it difficult for companies to lay out offices.
It also faces competition from more contemporary properties. Developer M. David Paul & Associates built the nearby Pointe, a 481,000-square-foot Class A office building in 2009. Its modern glass façade, eco-friendly design and open layouts are attractive to prospective tenants, area brokers said. Yet despite a high-profile lease by KCET last year, the building is only 40 percent leased, providing ample room for businesses in the market.
Trevor Belden, a principal at Lee & Associates LA North/Ventura Inc. in Sherman Oaks who brokers leases in Burbank, said the market can expect to feel those effects.
“The vacancy is going to have a negative impact for at least the next 12 to 18 months. We expect leasing rates to drop or concessions to go up,” he said.
Asking rents in Burbank averaged $3.38 in the last quarter of 2012, up three cents from the previous quarter, according to Jones Lang LaSalle. Belden couldn’t predict the expected decline, but said it could be significant in the Media District.
At the same time, only 70,000 square feet were absorbed in the market last year. If absorption rates continue on the same trajectory, it could take up to five years for Alameda Tower to fill up again.
The silver lining for Burbank, however, is that Disney’s relocations to Glendale don’t appear to be drawing other companies near it or changing its identity as the media hub.
“Burbank’s still the center of the universe for media and entertainment in the (San Fernando) Valley,” Belden said. “We don’t see that perception changing.”