Tri-Cities Office Sales Up

A spate of major deals has made the Tri-Cities the hottest commercial real estate market in Los Angeles, surpassing West L.A. and Hollywood. The most recent trade was a nearly 878,000-square-foot Glendale bundle – including two class A buildings, 801 N. Brand Blvd. and 700 N. Central Ave. CBRE Global Investors Ltd. bought the portfolio from New York hedge fund Blackstone Group for $122 million at the end of 2017. Several months prior in September, Blackstone was on the buying end, paying an impressive $1.7 billion for a portfolio of Burbank office buildings controlled by Worthe Real Estate Group. The deal included the Pinnacle I and II, a pair of buildings on West Olive Avenue with tenants Warner Bros. Entertainment, Warner Music, Fox Twentieth Television, I Heart Media and Morton’s The Steak House. Another jewel in the package was The Pointe at 2900 W. Alameda Ave. The nearly 500,000-square-foot building houses KCET-TV, Legendary Entertainment and DC Comics. Blackstone also purchased 3500 W. Olive Avenue, where major tenants include Worthe, Turner Entertainment and Shamrock Holdings Inc. In addition to the Blackstone transactions, Intercontinental Real Estate gained the 180,180-square-foot Connexion Burbank at 303 N. Glenoaks Blvd. for roughly $125 million while other stalwart transactions included the 700 Allen Ave. multi-property portfolio ($10.9 million) and 1600 E. Colorado St. in Glendale ($2.85 million). In Burbank, 2720 W. Magnolia Blvd sold for $1.95 million and 127 S. Glenoaks Blvd. traded for $1.5 million. According to David Nusbaum, senior research analyst at CBRE Southern California research, Burbank had a strong 2017, with a 230,000-square-foot net absorption while Pasadena reported 120,000 square feet of net absorption. While Glendale posted -52,000 square feet absorption for the year with several companies such as ACCO and Nestlé USA (in 2018) moving out, that statistic belies the overall trend in the Tri-Cities’ market. “Tri-Cities is up 250,000 square feet in net absorption for 2017,” Nusbaum said. “(Companies are) coming in because they see that value.” Entertainment as driver Media and entertainment companies account for most of the newcomers to Burbank. Prior to the Great Recession, Nusbaum said, Burbank enjoyed a strong market with vacancy rates in the low single digits. By 2012, vacancy had spiked to 20 percent but has since dropped to 11.5 percent. “When they’re talking about Hollywood as content capital of the world, they’re really talking about Burbank,” said Josh Gertler, CEO of Burbank-based Consensus, a public relations firm. In December 2016, after 20 years in downtown L.A., Consensus moved its operations to the Tower at 3900 W. Alameda Ave. in Burbank. Construction of the building finished in 2015, and Consensus was one of its earliest tenants. Gertler’s prime reason for taking his company to Burbank was for the city’s media facilities and talent. “The creative office environment was much further advanced (in Burbank) than it was elsewhere,” Gertler said. Moving into 2018, Stacy Vierheilig-Fraser, senior managing director of Sales & Leasing Division at Charles Dunn Co. Inc. in Sherman Oaks, believes many office brokers are waiting for the other shoe to drop on Walt Disney Co.’s acquisition of 21st Century Fox. “Does that bring more people from the Westside to Valley-side?” she asked. “Nobody knows yet.” Gertler said one detriment of relocating his 20-person agency from downtown L.A. was moving further from its events. However, better freeway access and an easier commute were all worth the trade-off for this East Valley resident. “Burbank is known to be exceptionally business friendly,” Gertler said. “The rates per foot were pretty comparable (but) parking is less expensive, and the business tax is less expensive.” Entertainment and media tenants often want creative office space, which includes a large and centrally located kitchen, recreation space, open floorplans and outdoor meeting space. Natalie Bazarevitsch, senior vice president of CBRE Advisory & Transaction Services, said that at two Glendale locations, 450 N. Brand and 625 N. Brand, “they are activating their exteriors, taking the office space from interiors and adding plaza seating, umbrellas, tarps and lunch destinations.” “There’s been a culture shift,” she explained. “It’s about tenant attraction and retention. Your office space has to offer way more than before. It can’t just be really comfortable chairs and a nice desk.” Glendale’s transformation The strength of the capital markets has helped transform Glendale, according to Bazarevitsch. “A lot of national and local players have moved (into the submarket),” Bazarevitsch said. “The city of Glendale embraced it and didn’t put a moratorium on the number of units. They were truly business-friendly people.” Last month, Newmark Knight Frank Executive Vice President Steve Kolsky told GlobeSt.com that the Tri-Cities market has become a solid lower cost option for entertainment and media companies looking or leasing in Hollywood. “Burbank specifically has become Hollywood North,” he said. Bazarevitsch added that while “Pasadena has always been a strong market, Glendale has the greatest runway (for raising rents). It has become a market unto itself.” “Glendale is still lower priced than Burbank and Pasadena, but it’s catching up,” Nusbaum added. “It’s no longer seen as the third wheel of the Tri-Cities market.” According to Colliers International, by the end of 2017’s fourth quarter, office rents in Burbank rose 27 cents from 2016’s Q4 to $3.44 a square foot to become the most expensive submarket in the San Fernando Valley while Glendale rents increased 16 cents from 2016’s Q4 to $2.78. In terms of investor interest, most of Glendale’s Class A office properties have sold to new ownership in the last 48 months, said Bazarevitsch. Nusbaum said many recent Glendale acquisitions indicate a turnover of big funds cashing in on recession-purchased acquisitions to compensate their investors. “This is a city that wanted to build up its downtown area,” Nusbaum said. “Now you have a vibrant community. It’s seen its vacancy rate go from more than 25 percent in 2010 to 11 percent as of in 2017.” Big moves Bill Boyd, senior managing director at the Glendale office of Charles Dunn Co., feels the Disney-Fox deal’s significance on Tri-Cities real estate may be overstated since Disney still has a lot of room for growth on its Burbank lot. What Boyd believes may have more import is Nestlé’s gradual relocation of its 750 employees to Arlington, Va. after nearly 30 years at Glendale’s 800 N. Brand Blvd. “It’ll have a significant impact on the rental rates,” Boyd said of the chocolate company vacating 350,000 square feet. The effect on leasing absorption will increase vacancy by at least 3 percent as Glendale only has a collective 6.5 million square feet of inventory. Despite Nestlé’s upcoming Glendale abandonment, such wholesale exoduses from Tri-Cities are an anomaly and agents such as CBRE are already marketing the space. A year ago, the Business Journal reported how Children’s Hospital, which already had two floors at 800 N. Brand, signed on to absorb another two floors of Nestlé’s former office space. Meanwhile, smaller tenants are flocking to Glendale. CBRE moved from Universal City to a renovated 1928-built, 59,492-square-foot building, which developer Caruso acquired for $6.6 million in 2015, and Bazarevitsch said “everyone is thrilled” about the move to Glendale’s erstwhile Masonic Temple. “At Universal City, it was more about geography than amenities and now we’re about amenities over geography,” she said. Another business that migrated to Glendale is Lewis Roca Rothgerber Christie LLP. The law firm moved in 2011 to 655 N. Central Avenue, a handsome, more contemporary, 24-story, 1999-completed edifice. “It was absolutely the right decision,” said the firm’s Chief Financial Officer Albert Woo. “There is no other building like this in Glendale. When we moved in, it was about 60 percent occupied. Today, it’s fully occupied.” Before its December 2011 move-in, LRRC had been located within walking distance of Old Town Pasadena’s lunch spots. “That was something a lot of the attorneys missed (post-move),” Woo said. However, a dearth of restaurants is no longer an issue as hip eateries such as Lemonade, Eggslut and Shake Shack have since planted flags in Glendale. Many attribute Glendale’s blossoming to “the Caruso effect” or “the halo effect from the Americana,” as Woo described it, referring to a whole new wave of retail and residential investment. Since Caruso’s Americana at Brand opened in 2008, myriad eateries, cafes and stores have populated around the outdoor mall’s parameters. “The growth has been nothing short of phenomenal,” Woo said.