No Signs of Improvement

While the Tri-City office market experienced a net absorption in leasing activity (increased tenant occupancy) of over 300,000 square feet last year, the first two quarters of 2008 have started off with a net loss of tenants occupying the local buildings.

As of the end of the second quarter 2008, the Tri-Cities office market (which includes Burbank, Pasadena and Glendale) consisted of 18.5 million square feet of non owner-user office space within buildings greater than 20,000 square feet and ended mid 2008 with a 10.2% vacancy rate and over 100,000 square feet of negative absorption.

While Burbank led the market with the lowest vacancy rate of 5.1%, up from the 3.8% at the end of 2007, Glendale had the highest vacancy rate of 14.8% and even higher than the 13.4% one year ago at this time. The most significant change occurred in Pasadena. Pasadena’s vacancy was at 12% during the previous quarter and dropped to 10% at the end of the 2008 second quarter. (However, it is also significant to point out that Pasadena had a dramatic increase in vacancy in the fourth quarter of 2007 primarily due to IndyMac Bank vacating over 200,000 square feet of office space and 160,000 square feet of it was out of one single building in East Pasadena. The recent drop in Pasadena vacancy may be soon negated by the end of this year as more IndyMac Bank office space is vacated.)

All three submarkets have experienced “negative absorption”, meaning more space was vacated than leased, during the first six months of 2008. Pasadena has experienced the least amount of negative absorption so far in 2008 at only 7,800 square feet and Glendale experienced a negative absorption of 41,000 square feet while Burbank led the market with over 68,000 square feet of negative absorption. For all of 2007, Glendale was the only submarket within the Tri-Cities office market to experience a positive net absorption of over 80,000 square feet. The Tri-City office market will be severely challenged to achieve a net positive absorption in 2008 as the leasing slow down shows no sign of turning around this quarter. The 80,000 square feet of positive absorption in Glendale last year was primarily due to a few tenants leaving Pasadena and relocating to Glendale. The most significant of those tenants was Yellow Pages, Inc., who moved from Pasadena to Glendale earlier in 2007.

As of the end of second quarter 2008, the average asking rental rate for Class A office space in the Tri-Cities office market was $3.20 per square foot per month on a full service gross basis. The average asking rental rate for Class B office space was $2.89. While both Class A and Class B office space have seen tremendous leasing activity over the last few years within the Tri-Cities office market, that trend is expected to come to a dramatic stop in 2008.

                        
Although the Tri-Cities market experienced negative net absorption during the first half of 2008, the market continues to be bullish about the future. Currently, two Class A office buildings totaling over 800,000 square feet are under construction in Burbank and due to be completed during the first quarter of 2009. Maguire Properties is nearing completion of 207 Goode Avenue in Glendale, which is a 187,000 square-foot Class A office building due to be completed by the second quarter of 2009. In Pasadena, Investment Development Services, Inc. is planning a 150,000 square-foot office development at the corner of Colorado Boulevard and El Molino Avenue in the Pasadena Playhouse District area and the Shoppes at Fair Oaks, LLC is moving forward with the development of a 30,000 square foot office building with ground floor retail on Fair Oaks Avenue just north of Colorado Boulevard in Old Pasadena to be delivered during summer of 2009.

Linda P. Lee
Vice President
Grubb & Ellis Company
445 S. Figueroa St—Suite 3300
Los Angeles, CA 90071
Tel: 818-502-8025
Tel: 213-596-2277
Fax: 213-488-0819