Key Takeaways. > The Tri-Cities office market saw vacancy increase 13.3% to. 13.7%, the first increase seen in the la
Research & Forecast Report
TRI-CITIES | OFFICE Q2 2016
Accelerating success.
>> Tri-Cities Rents Continue to Rise Key Takeaways
> The Tri-Cities office market saw vacancy increase 13.3% to 13.7%, the first increase seen in the last five quarters. > Despite the blip in vacancy, rents continued their ascent, landing at an average asking rate of $2.87 per square foot (PSF) Full Service Gross (FSG). Up 3.2% year-over-year, this marks eight straight quarters of increases for the Tri-Cities market. > Leasing activity in the Tri-Cities recorded at 576,600 square feet (SF), up 17.0% from last quarter.
Market Indicators | Relative to prior period
Rental Rate
Summary Statistics | Tri-Cities, Q2 2016
> A flurry of investment activity occurred in the market, with five major sales in Pasadena and Glendale. The largest consisted of Granite Properties doubling down in Glendale by acquiring 550 N. Brand Blvd. from Clarion Partners for $79.7 million. The 304,500 SF office tower is next to Granite’s other Glendale property, 500 N. Brand Blvd., which it acquired in 2013.
Net Absorption*
Investment activity picked up with 5 major sales occurring in Glendale and Pasadena. For investors, sizeable discount to replacement cost and rents below peak levels are helping to fuel activity, along with a varied tenant base for the Tri-Cities market.
Construction
Vacancy Rate
In the second quarter of 2016, the Tri-Cities market saw its first negative absorption in more than two years. Despite the rise in vacancy, robust leasing activity and a gradual rise in rents still indicates some confidence in the market. Four of the five submarkets saw modest increases in rates for a net gain of $0.02.
Forecast
Net Absorption
> There were no new construction deliveries this quarter, a trend that will continue through the end of the year with the development pipeline showing signs of slowing.
Tri-Cities Office Market
Q2 2016 Vacancy
Class A
Class B
All Classes
13.7%
14.7%
13.7%
-10
+160
+40
2.7
-90.0
-84.5
Change from Q1 ‘16 (Basis Points)
Construction Completions* Under Construction*
0.0
0.0
0.0
113.8
0.0
0.0
*SF, Thousands
Asking Rents | Tri-Cities, Q2 2016 Average Asking Rent Change from Q1 ‘16 ($)
Y.O.Y. Change (%)
Class A
Class B
Class C
All Classes
$3.00
$2.51
$2.61
$2.87
+$0.05
-$0.03
+$0.31
+$0.02
3.8%
1.9%
12.9%
3.2%
Labor Force | Los Angeles County, Q2 2016 Total Nonfarm
Prof. & Business Services
Financial Activities
12-mo Employment Growth (%)
2.4%
2.1%
2.5%
12-mo Actual Employment Change
101,000
12,500
5,300
TRI-CITIES | OFFICE
> Negative absorption for the quarter led to vacancy rising by 40 basis points from 13.3% to 13.7%.
Historical Vacancy v. Rents
Tri-Cities Office Market Q2 ‘12-’16 RENTS
> Glendale and Pasadena posted lower vacancies for the quarter, with 11.5% and 14.2% respectively.
Absorption and Leasing Activity
> Absorption in Tri-Cities was negative for the first time in nine quarters, with 3 out of the 5 submarkets posting negative demand.
$3.00
15% $2.70 10% $2.60
Rental Rates
> Average asking rents have seen a modest increase of 3.2% year-over-year, dropping off from the 5.7% growth seen from 2014 to 2015. > Pasadena experienced the largest delta in rents from last quarter, increasing $0.04. High quality space and its reputation as an engineering/technology hub have contributed to one of the higher average rates ($2.92 PSF FSG) in the Tri-Cities market.
$2.40
0% 2Q12
2Q13
2Q14
2Q15
2Q16
Net Absorption by Submarket Tri-Cities Office Market Q2 ’16 60,000 37,100
40,000
33,600
20,000 0 (3,000) (20,000) (40,000) (60,000) (65,300)
(80,000)
(86,900)
(100,000) Glendale
Pasadena
Arcadia
Monrovia
Burbank
Historical Leasing Activity
Tri-Cities Office Market Q2 ‘12-‘16 1,000,000
> The overall average asking rent of $2.87 PSF FSG is the highest since the first quarter of 2009. However, it falls short of the post-recession high of $3.13 a year earlier.
900,000 800,000 700,000 600,000
SF
> Forecast: Rising rents in the Tri-Cities market are expected, but modest demand might flatten out gains going forward.
5%
$2.50
SF
> Forecast: Absorption and leasing activity are expected to stay steady through 2016 as the Tri-Cities market continues to be a top destination for tenants in a variety of industries, including media/entertainment, insurance and engineering.
20%
$2.80
> Major move-ins in the market included video entertainment network Machinima moving into 18,500 SF at 3500 W. Olive Ave. in Burbank and insurance brokerage Acrisure, Inc. occupying 15,900 SF at 425 W. Broadway in Glendale. > Among the leases signed this quarter was Disney signing a direct lease for 128,300 SF at 3355 W. Empire Ave in Burbank, where they had previously been subleasing from Yahoo!, and Hasbro signing at the same campus (3333 W. Empire Ave.) for 80,000 SF. In addition, food manufacturer Cacique agreed to occupy 28,400 SF at 800 E. Royal Oaks in Monrovia, while Team Services renewed and expanded for 25,200 SF at 901 W. Alameda Ave. in Burbank.
25%
$2.90
$ PSF PER MONTH (WEIGHTED)
> Forecast: A lack of demand caused an uptick in vacancy, but leases signed in the past few quarters will help to push vacancy down through 2016.
VACANCY
% VACANT (TOTAL)
Vacancy
Q2 2016
500,000 400,000 300,000 200,000 100,000 0 2Q12
2
2Q13
2Q14
2Q15
2Q16
TRI-CITIES | OFFICE
Construction
> Construction remains light in the Tri-Cities market, as only one property remains under construction.
Q2 2016
Historical Net Absorption & Construction Completions Tri-Cities Office Market Q2 ‘12-’16
> 203 W. Olive Ave. in Burbank is under construction by Accord/SHO Members LLC. The 113,800 SF building will serve as Nickelodeon’s headquarters facility as the company consolidates employees from off-site locations after a period of high growth. The building is contiguous to their existing production campus.
CONSTRUCTION COMPLETIONS
400,000 300,000 200,000 100,000 0
SF
> Forecast: Construction deliveries in the near future will have little effect on leasing fundamentals, as the only building scheduled to deliver is fully pre-leased by Nickelodeon.
NET ABSORPTION
500,000
(100,000)
(200,000) (300,000)
> Investment activity for properties over 25,000 SF rose in sales volume this quarter, recording $266.8 million over 5 transactions, up from $256.0 million over 1 transaction last quarter. > Pasadena saw the lion’s share of activity, with 465 N. Halstead St., 1055 E Colorado Blvd. and 70 S. Lake Ave trading for $280 PSF, $348 PSF and $319 PSF, respectively.
(500,000) 2Q12
2Q14
2Q15
2Q16
Investment Trends Chart
Tri-Cities Office Market ‘10-’16 Average Price PSF
> Investment activity picked up in the Tri-Cities as several under contract buildings closed this quarter. Year-to-date, 2016’s dollar volume of $617.6 million is on pace to exceed 2014’s six-year high of $705.8 million in sales.
Cap Rate
$350.00
8
7
$300.00
6
$250.00
5 $200.00
$/PSF
> Forecast: Under contract properties and those yet to come to market, along with minimal interest rate increases, will keep investment activity steady throughout 2016.
2Q13
4 $150.00 3
Outlook
Going forward, the Tri-Cities market continues to be an attractive market for many tenants from a variety of industries. Large blocks of space still remain in some of the core submarkets, such as Pasadena and Burbank, at a price discount relative to other markets in the Greater Los Angeles region. It is expected that the Tri-Cities market will remain relatively insulated against large shifts in the market due to stable tenant demand and a scarcity of new available construction. While the outlook remains positive overall, it should be noted that the Tri-Cities market is not seeing the types of gains in rental rate velocity nor demand it saw in 2015.
$100.00
2
$50.00
1
$-
0 2010
2011
2012
2013
2014
2015
2016
Unemployment Rate | U.S., CA & Los Angeles County | May 2016 5.3%
5.2%
5.2% 5.1% 5.0%
4.9%
4.9% 4.8% 4.7%
4.7%
4.6% 4.5% 4.4% United States
3
California
Los Angeles County
Cap Rate
Investment Trends
(400,000)
TRI-CITIES | OFFICE
Q2 2016
Market Description
Submarket Map
The Tri-Cities office market is a relatively small market, comprised of 23.0 million SF and represents just 8.5% of the total office space in buildings 25,000 SF and greater within the Los Angeles Basin. It is one of the premier locations for firms in entertainment (primarily in Burbank), insurance (primarily in Glendale), high tech/engineering (primarily in Pasadena stretching through Arcadia and into Monrovia), finance and professional services sectors. Much of the space is relatively new with 46% built in 1985 or later. In contrast to most office markets in the region, a relatively large percentage of the space is in mid-rise (50%) and high-rise (20%) buildings.
RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Tri Cities Office Market Q2 2016
SALES ACTIVITY PROPERTY ADDRESS
SIZE SF
SALE PRICE
PRICE PSF
BUYER
SELLER
550 N. Brand Blvd., Glendale
304,500 SF
$79,725,000
$261 PSF
Granite Properties, Inc.
Clarion Partners
465 N. Halstead St., Pasadena
238,800 SF
$67,000,000
$280 PSF
EverWest Real Estate Partners LLC
DivcoWest/Edgewood Realty
1055 E. Colorado Blvd., Pasadena
175,900 SF
$61,250,000
$348 PSF
Beacon Capital Partners
Piedmont Office Realty Trust, Inc.
70 S. Lake Ave., Pasadena
98,600 SF
$31,500,000
$319 PSF
Alliance Bernstein
Legacy Partners
500 N. Central Ave., Glendale
123,700 SF
$27,325,000
$220 PSF
Volwood Corp.
Peregrine Realty Partners
LEASING ACTIVITY PROPERTY ADDRESS
LEASED SF
LEASE TYPE
BLDG TYPE
LESSEE
LESSOR
3355 W. Empire Ave., Burbank
128,300 SF
Direct-New
A
Walt Disney Company
Shorenstein
3333 W. Empire Ave., Burbank
80,000 SF
Direct-New
A
Hasbro Inc.
Worthe Real Estate Group
800 E. Royal Oaks Dr., Monrovia
28,400 SF
Direct-New
A
Cacique
Monrovia Tech Campus
901 W. Alameda Ave., Burbank
25,200 SF
Renewal/Expansion
B
Team Services
Rexford Industrial
3500 W. Olive Ave., Burbank
18,500 SF
Direct-New
A
Machinima, Inc.
Clarion Partners
MAJOR DEVELOPMENTS
4
PROJECT
DEVELOPER
SIZE SF
SUBMARKET
STATUS
ESTIMATED COMPLETION
203 W. Olive Ave., Burbank
Accord/SHO Members LLC
113,800
Burbank
Under Construction
Q4 2016
160 W. Olive Ave., Burbank
Cusumano Real Estate Group
255,000
Burbank
Proposed
TBD
3377 W. Empire Ave., Burbank
Worthe Real Estate Group
175,000
Burbank
Proposed
TBD
TRI-CITIES | OFFICE
Q2 2016
oFFICE OVERVIEW Tri Cities Office Market Q2 2016
EXISTING PROPERTIES
VACANCY
Bldgs
Total Inventory SF
Direct Vacancy
A
34
6,041,400
B
15
678,500
Submarket/ Class
ACTIVITY
ABSORPTION
Leasing Total Leasing Activity Vacancy Activity YTD Current Qtr Prior Qtr SF SF
Sublease Vacancy
Total Vacancy
15.8%
0.4%
16.2%
15.0%
350,100
6.0%
0.2%
6.3%
4.4%
25,400
Net Absorption Current Qtr SF
Net Absorption YTD SF
589,100
(74,100)
38,400
(12,400)
CONSTRUCTION
RENTS
Completions Current Qtr SF
Under Construction SF
(24,600)
0
113,800
$3.15
(12,400)
0
0
$2.58
Weighted Avg Asking Lease Rate
BURBANK
C
3
131,900
1.1%
0.0%
1.1%
0.8%
0
1,000
(400)
(1,400)
0
0
$1.93
Subtotal
52
6,851,800
14.6%
0.4%
15.0%
13.7%
375,500
628,500
(86,900)
(38,400)
0
113,800
$3.12
A
25
5,379,400
11.8%
0.1%
11.9%
12.7%
29,800
138,200
43,300
11,200
0
0
$2.61
B
15
785,400
8.7%
0.0%
8.7%
7.9%
22,200
28,800
(6,200)
82,000
0
0
$2.30
GLENDALE
C
0
0
0.0%
0.0%
0.0%
0.0%
0
0
0
0
0
0
$0.00
Subtotal
40
6,164,800
11.4%
0.1%
11.5%
12.1%
52,000
167,000
37,100
93,200
0
0
$2.58
A
27
4,764,800
11.7%
0.5%
12.2%
13.0%
31,100
71,100
39,400
43,400
0
0
$3.29
B
40
3,331,300
18.0%
0.3%
18.3%
18.1%
88,100
150,400
(7,400)
(24,800)
0
0
$2.58
PASADENA
C
9
376,400
3.2%
0.0%
3.2%
3.6%
1,500
17,800
1,600
13,400
0
0
$2.69
Subtotal
76
8,472,500
13.8%
0.4%
14.2%
14.6%
120,700
239,300
33,600
32,000
0
0
$2.92
A
2
120,300
2.5%
1.6%
4.1%
1.6%
0
0
(3,000)
(3,000)
0
0
$2.29 $2.21
ARCADIA B
4
188,800
4.4%
0.0%
4.4%
4.4%
0
400
0
700
0
0
C
1
25,000
0.0%
0.0%
0.0%
0.0%
0
0
0
0
0
0
$1.85
Subtotal
7
334,100
3.4%
0.6%
3.9%
3.0%
0
400
(3,000)
(2,300)
0
0
$2.23
$2.39
MONROVIA A
4
406,500
22.1%
0.0%
22.1%
21.4%
28,400
28,400
(2,900)
87,900
0
0
B
9
714,100
12.1%
3.4%
15.5%
6.5%
0
2,000
(64,100)
(82,300)
0
0
$2.16
C
1
25,000
0.0%
0.0%
0.0%
6.7%
0
1,700
1,700
0
0
0
$1.50
Subtotal
14
1,145,600
15.4%
2.1%
17.5%
11.8%
28,400
32,100
(65,300)
5,600
0
0
$2.28
A
92
16,712,400
13.4%
0.3%
13.7%
13.8%
439,400
826,800
2,700
114,900
0
113,800
$3.00
B
83
5,698,100
14.1%
0.6%
14.7%
13.1%
135,700
220,000
(90,100)
(36,800)
0
0
$2.51
C
14
558,300
2.4%
0.0%
2.4%
2.9%
1,500
20,500
2,900
12,000
0
0
$2.61
Total
189
22,968,800
13.3%
0.4%
13.7%
13.3%
576,600
1,067,300
(84,500)
90,100
0
113,800
$2.87
MARKET TOTAL
Note: revisions to the inventory base were made effective Q2 2016, historical data reported here reflect these revisions and may not match data reported in previous quarters.
5
TRI-CITIES | OFFICE
Definitions of key terms in this report Total Rentable Square Feet: Office space in buildings with 25,000 square feet or more of speculative office space. Includes competitive space in Class A, B and C single-tenant and multi-tenant buildings. Excludes non-competitive owner-occupied buildings, buildings that include 30 percent or greater of medical or retail space, and space that is under-construction, underrenovation or off-market. Class A Space: Space that an image-conscious company would lease for its headquarters. Typically, this space has a very high level of finish and an excellent location, and commands the highest rents in the market. Class B Space: Highly functional, attractive space, but less prestigious than Class A Space, and commanding lower rental rates. Class C Space: Functional, competitive space, but with a lower level of finish and/or a less desirable location than with Class B Space, and commanding lower rental rates. Low-Rise: Buildings with a total of 4 floors or less. Mid-Rise: Buildings with a total of 5 to 13 floors. High-Rise: Buildings with 14 or more floors. Direct Vacancy: Space in existing buildings that is vacant and immediately available during the quarter for direct lease, plus space that is vacant but not available for direct lease or sublease (for example, that is being held for a future commitment). Total Vacancy: Space in existing buildings that is vacant and immediately available during the quarter for direct lease or for sublease, plus space that is vacant but not available for direct lease or sublease. Net Absorption: Net change in occupied square feet from one period to the next (includes the impact of change in vacant space available for sublease). Leasing Activity: Square feet leased from all known transactions completed during the quarter. Excludes lease renewals. Weighted Average Asking Rental Rates: Weighted by the total square feet available for direct lease. Data is based on Full Service Gross rents, and includes all costs associated with occupying the space, including taxes, insurance, maintenance, janitorial service and utilities. Reported on a monthly, per SF basis. 6
Q2 2016 Space Added (Net): Total square feet added during the quarter via construction completions, including renovated space returned to market, less total square feet taken off-market due to demolitions or conversions. Under Construction: Includes buildings that are in some phase of construction, beginning with foundation work and ending with the issuance of a Certificate of Occupancy Technical Note: Colliers International is continuously refining its database. The data shown in the historical tables and graphics in this report have been adjusted to take into account these changes in the database. This report has been prepared by Colliers International for general information only. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This report and other research materials may be found on our website at www.colliers.com/greaterlosangeles.
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> $2.5 billion in annual revenue > 2.0 billion square feet under management > Over 16,100 professionals
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Regional Research Analyst Research Services
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