Studio Retrenchment Makes Glendale Space a Tough Sell
Earlier this year, as workers put the finishing touches on Glendale Plaza, the 24-story tower symbolized a highflying real estate market where space was scarce and rents were climbing.
But now, less than six months after its grand opening, the $100-million high-rise--which stands about 65% empty--serves as a giant omen that is scaring off other developers and raising concerns about the area’s reliance on the retrenching entertainment business.
“A lot of us had been watching Glendale Plaza. I think we had higher expectations for it,” said James Shaw, who heads the Los Angeles office of real estate lender Cohen Financial. “It has shown that [the area] is a shallow and extremely limited market.”
There are many signs that firms outside the entertainment business--including financial services and technology companies--continue to sign up for space in Glendale and surrounding communities.
But that growth has not been enough to prevent office vacancy rates in Glendale from hitting nearly 15% after dropping below 10% a year ago, according to data provider CoStar Group Inc. Much of the increase can be tied to Glendale Plaza opening its doors with most of its 532,000 square feet unleased. And that’s why some rival developers are giving up on building new office space in the area.
Across the street from Glendale Plaza, developer Maguire Partners is courting hotel operators instead of entertainment firms to fill what was once intended to be a huge office complex. Nearby, Los Angeles-based Reliance Development is also planning to build a hotel after giving up on plans for an office tower.
“I think [Glendale Plaza] has been an interesting barometer,” said Timothy Walker, a partner at Los Angeles-based Maguire Partners. “‘I think it’s made people say, ‘Hey, how fast do I want to go out and build something here?’ ”
Demand for commercial space in Glendale and surrounding communities has been undermined in large part by entertainment cutbacks. Under pressures to reduce costs, major studios have curtailed the leasing of new space and stepped up construction activity on their own lots. Many studio executives also suggested that developers might be focusing too much on standard office space--the bread-and-butter of most developers--and not enough on the production facilities the industry needs.
Last year, during a real estate outlook conference at Warner Bros. in Burbank, Dan Garcia, head of corporate real estate for the studio, warned: “If I was a developer, I wouldn’t assume every single square foot [we need] would be in Class A-1 office space.”
Along the 134 Freeway, which links Burbank and Glendale, the only major, visible construction is at Walt Disney Co., which is erecting an office building in Burbank for its ABC network subsidiary and a new Glendale headquarters-studio for KABC-TV.
As a result, Glendale and Burbank--which together with Pasadena compose the so-called Tri-Cities market--are highly sensitive to real estate moves at the studios, particularly Warner and Disney, both headquartered in Burbank.
During the entertainment industry’s fast-growing years, entertainment firms ran out of room in Burbank and headed east to Glendale, filling up space along Brand Boulevard and raising hopes of further entertainment-related development.
“A lot of people falsely believed that the entertainment industry wanted to be on Brand Boulevard,” said real estate broker Matthew Miller at CRESA Partners. “When Warner and Disney demand leveled off, those players pulled out. It really changed that market.”
Glendale Plaza, developed as a speculative project by Glendale-based PacTen Partners, was conceived in the era when the studios were expanding and the vacancy rate in prime Glendale office buildings dove to as low as 5%. In fact, the windows of the top floors of the building are designed to mimic the industrial look popular among studio professionals.
But even before construction was completed, it became clear that the entertainment business was slowing down. So, instead of a glamorous entertainment firm, the first major lease signed at Glendale Plaza was by an insurance company. State Compensation Insurance Fund will occupy 135,000 square feet, or about 25%, of the tower.
Despite the substantial size of that lease, the lack of a major entertainment tenant only fueled concern about the real estate market in Glendale and the rest of the Tri-Cities area. Broker Douglas P. Marlow, who heads leasing at Glendale Plaza, shows up at presentations with a poster plastered with a recent batch of negative headlines, including: “Tri-Cities: New Buildings Have Difficult Time Finding Tenants.”
Marlow, who works at CB Richard Ellis, says leasing at the building is meeting expectations and will soon reach 50% if current tenant negotiations come to fruition. But he is not counting on entertainment firms to fill much of the space. At most, they will occupy about a third of the tower.
“It had to slow down,” said Marlow of the entertainment industry. But, he adds, “there are a lot of companies out there are that are bullish on the market.”
Current market statistics support Marlow. Despite a surge in the vacancy rate in Glendale, the vacancy rate for the Tri-Cities has remained fairly stable at about 9%. In fact, Pasadena has seen its vacancy rate dip over the past year to below 10%. Burbank remains ultra-tight, with a vacancy rate of less than 5%.
Marlow and other developers point out that many of the new leases are being signed at low-rise office buildings, which are flexible enough to allow for studio production facilities.
The high-rise nature of Glendale Plaza has made it a tougher sell among entertainment firms, said Marlow.
One potential music industry client told him bluntly: “We’re not a high-rise tenant.”
In Burbank, developer M. David Paul has so far filled more than 500,000 square feet of low-rise office space in a development near Burbank Airport. The firm has recently begun work on a five-story, 215,000-square-foot building with asking rates about as high as those at Glendale Plaza.
“I don’t agree that the market has gone soft. The problem is with Glendale,” said Jeff Worthe, a principal at M. David Paul. “We have a couple of entertainment companies [interested in the new building] and we are seeing a lot of software and Internet-related activity.”
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Glendale’s Empty Feeling
The opening of a single, speculative high-rise office building in Glendale has resulted in a substantial boost to the city’s office vacancy rate. Office vacancies in the Tri-Cities area--Glendale, Burbank and Pasadena--have remained stable.
Office Vacancy Rates
Glendale only: 2nd-quarter 1999 with sublet: 14.3%
Tri-Cities area, including Glendale: 9.4%
Note: Vacancy rate is the total square footage divided by total rentable square footage in all existing buildings. Sublet space is space rented by primary tenants that is vacant and available for sublease.
Source: CoStar Group Inc.
