By: Mark Semotiuk
Glendale and Pasadena are two very similar cities located in the Tri-Cities submarket of Los Angeles. However, a divergence has emerged in the office market between the two cities with Pasadena becoming the premium market.
The proximity and similarities of the two cities control for many influential factors and help to isolate those factors leading to the divergence in rents and vacancy rates.
Glendale and Pasadena have similar geographic characteristics, comparable demographics and are almost equidistant from downtown Los Angeles. There are, however, subtle differentiations.
Glendale is slightly larger geographically while Pasadena boasts a somewhat higher household median income - $46,012, compared to $41,805 for Glendale. Pasadena also has distinct advantages such as a strong engineering and technology base.
However, a main driver for office growth that these cities have shared in the past has been the relocation of firms moving from Mid-Wilshire and downtown Los Angeles due to the low cost of doing business, cheap and abundant parking and access to skilled labor.
The office markets in both cities were once similar in size. But in the late 1990s, coinciding with the revitalization of Old Town Pasadena, growth in the Pasadena office market allowed it to slowly overtake that of Glendale.
Today firms from Glendale are moving back to the Mid-Wilshire and downtown Los Angeles markets, while firms in Pasadena are staying. The result is that Glendale has transitioned into one of the weakest office markets north of the Santa Monica Freeway while Pasadena’s office market continues to flourish.
There has been significant development in the Pasadena Class A office market in recent years. Meanwhile, other submarkets, such as Class B in Pasadena and both Class A and B in Glendale, have been stagnant.
The divergence between the markets is most striking when looking at vacancy rates. Up until around 2003, the vacancy rates between the markets were tightening. However, a reversal in this trend emerged, particularly in Class A office space.
While office vacancy rates in Los Angeles County are near 10 percent, vacancy stands at above 12 percent in Glendale and an astonishingly low rate of 4 percent in Pasadena.
Tightening vacancy rates exist for all submarkets except for the Class A submarket in Glendale, which is driving the overall Glendale vacancy rate higher.
Glendale continues to struggle with no indication of new tenants coming into Glendale from other markets and very little growth from existing tenants.
While there has been moderate growth in office rents in both markets, the effects of this divergence are beginning to emerge in this area as well.
Although Pasadena has recently outstripped Glendale in overall rental rates, Class A space remains comparable between the two markets. However, much of the rent growth in Pasadena can be accredited to Class B rents which are 23 percent higher today compared to 2000.
Glendale’s Class B rents have been more volatile, registering an overall gain of 4 percent in the same period. Most noteworthy, however, is the spread between Pasadena Class B rents and Glendale Class A rent, which appears to be tightening.
The divergence between the two markets must be understood in the context of the supply. Between 2000 and 2006, Pasadena added almost 1 million square feet of office space while Glendale lost 40,000 square feet.
The net absorption indicates that Pasadena has a healthy appetite for new buildings while Glendale is struggling to keep what tenants they have.
But this begs the question: What is driving the recent divergence?
The Influence of Retail
The timing of Pasadena’s office market divergence is highly correlated with the resurgence of retail amenities that give the city a competitive advantage. Difference in size between the Pasadena and Glendale office and retail markets over the past six years has increased with the growth in the retail space matching that of the office market.
Unlike Pasadena’s retail growth, Glendale’s retail development has stagnated, providing a drag on the office market. Meanwhile, the total retail market lease revenue gap between Pasadena and Glendale has grown from 5 million to over 10 million dollars and the office market gap from 1.6 million to 5.9 million. Pasadena was able to achieve such strong retail and consequently office growth by activating its western retail corridor to create a market large enough to draw from a trade area including surrounding the affluent San Marino, South Pasadena and Arroyo markets. Glendale may have a hard time competing in a similar manner. While CIM Group recently sold the Tiffany’s building on Colorado, Brand Boulevard continues to lease to discount retailers that cater to the local constituents of Glendale and the surrounding areas.
The 15.5-acre Caruso Affiliated development in the heart of Glendale which is under construction includes 475,000 square feet of retail and 338 residential units and may help close the retail gap between the cities. However, even the completion of this major development will not shrink the retail gap to year 2000 levels, implying that Pasadena will continue to have a competitive advantage until there are further significant developments in Glendale’s retail environment.
Mark Semotiuk is a master of real estate development candidate at the University of Southern California.
Reprinted with permission from the California Real Estate Journal, May 2007.