Behind the Numbers, a Darker Side to Burbank’s Success

Success is often a mixed blessing.

Burbank has evolved into an office market envied by most commercial landlords around the country for its low vacancies, escalating rental rates and first-class entertainment tenants. While Los Angeles County has an office vacancy rate approaching 20% for most of the better buildings surveyed by various real estate brokerage firms, Burbank’s Media District posted a 5% vacancy rate at the start of July, downtown Burbank posted a 13% vacancy rate and Universal City had a 3% vacancy rate, according to figures compiled by Beitler Commercial Realty Services.

These numbers don’t tell the full story, however. For example, the Media District’s vacancy rate is based on 103,395 square feet of space being offered by building owners. That number doesn’t include another 166,809 square feet of so-called sublease space being offered by tenants who have vacated their offices or are planning to before expiration of their leases. A new look at the numbers more than doubles the Media District’s real vacancy rate.

Pricey rents and corporate downsizing are also exacting their toll on the Burbank office market. “Companies are realizing that they don’t need to be in the Media District,” said Mark Sullivan, managing director at Julien J. Studley Inc. “They can go to Warner Center, Encino, Van Nuys or North Hollywood and save a lot of money,” he added.

In the last six months, Sony’s home video unit pulled out of about 32,000 square feet in the Central Park office building on Olive Avenue. IDC Services merged with Disc, leaving two floors vacant at 2600 W. Olive. Meanwhile, ASI Market Research, owned by the same company that owns IDC, wants out of another floor of space at the same 2600 W. Olive building. Polygram Records vacated about 19,000 square feet at Burbank Center on 3800 W. Alameda Ave.

And Booth & Simpson left 17,000 square feet at 10850 Riverside Drive in North Hollywood, just outside Burbank. Texaco is trying to sublease 34,000 square feet in 10 Universal City Plaza. IBM left 60,000 square feet at 303 N. Glenoaks Blvd. in Burbank. And DIC Enterprises wants out of 40,000 square feet at Business Arts Plaza on Olive.

“The success of the area has been due in large part to entertainment companies,” Sullivan observed. But the success has inflated monthly rental rates up to $2.45 a square foot, compared with Encino rates of just $1.85 to $1.95 a square foot. For a small 2,000-square-foot office, that translates into a difference up to $14,400 a year--not to mention more expensive parking rates in Burbank.

“As leases roll over, you’ll see tenants leave. There’s no reason for them to stay,” Sullivan predicted. As for sublease space, he said, “tenants want big discounts when they are subleasing.” The reason is they have to live with the lease negotiated by the original tenant, regardless of how onerous or inconvenient it may be.

Sublease space is becoming a market all its own, said Larry Rappoport, director of financial and marketing services at the offices of Beitler Commercial in Sherman Oaks. “It’s now becoming a second market.”

Columbia and its parent Sony may vacate up to another 400,000 square feet of office space in Burbank as a result of a planned consolidation in Culver City. Disney has unveiled plans to build more space on its own lot in Burbank, eliminating the need for leasing in the Media District. Warner Brothers is also contemplating more buildings on its lot to serve the needs of tenants that are now leasing space in commercial office buildings. Lockheed Corp., of course, has many parcels for sale in Burbank next to the airport. So far, it’s been a hard sell in this economy.

“These projects could have a detrimental effect on the market,” Rappoport said.

It’s not all doom and gloom, though, Rappoport was quick to add. Burbank and nearby communities of Universal City, Glendale and Pasadena are still doing a lot better than most other office markets. “We’re seeing a lot of small tenants sign leases,” he said. So far, there aren’t enough replacement tenants to make up for the ones leaving, but Rappoport is hopeful.

Increased amounts of sublease space now on the market are a result of “firms seeing everyone else getting lean and mean,” said Kevin Balenger, an agent with Grubb & Ellis Commercial Real Estate Services in Sherman Oaks. By some estimates, the amount of such space has increased fourfold over the last year in the so-called Tri-Cities of Burbank, Glendale and Pasadena, creating more competition for landlords in their attempts to lease space directly to tenants.

“The fact that we have these large chunks of space is a relatively new phenomenon,” Balenger said, but he expects that most of the Burbank space now available will be filled over the next two years--especially given the lack of new construction.

“Rental rates will remain steady,” Balenger said. “It’s still a fairly tight market compared to the rest of Los Angeles and the rest of the nation.”