What a difference 6 months makes
By Hoss MacVaugh, Owner/Broker, MacVaugh & Co. Commercial Real Estate
As of our last report the Class A buildings in Pasadena had raised rates by about 50% from $2.50 to $3.75 with callous disregard to renewing tenants. The choices at the time were limited. According to some data, Pasadena was faced with a 4-5% vacancy. The choices were to stay and pay or move to the surrounding cities. We predicted at the time that there would not be a significant softening in rates due to the financing structures of the purchases. The Lenders simply would not allow it. We further suggested that we would probably see the vacancy rate go up due to tenant flight to surrounding markets.
So what has happened to the Pasadena office market between November 2007 and May 2008?
The Credit industry is in the toilet, and our vacancy rate, including sublease is now about 11%. Countrywide has offered 70,000 of sub-lease space feet at 155 N Lake alone. There are a lot of smaller mortgage companies that have just closed their doors. Tenants are sitting on the sidelines if they aren’t forced into making a choice. Lease rates have not appreciably softened. Banks aren’t lending. The Buyers are now vulture funds, standing by, waiting for the real blood. Consumer confidence is low (some blame it on media.) De je vue 1990.
When it comes to leasing activity/broker performance, the Building owners are now starting to shoot the Messengers.
CBRE has taken over the responsibility of marketing the Pasadena Towers and have moved to the strategy of not quoting a rate (although $4.70 is still their target.) According to CoStar, between the two towers, they lost about 65,000 ft of tenants between the last quarter of 2007 and the 1st quarter of 2008. Embarcadero Capital, owner of 234 E. Colorado, has realized that they do need help from the professionals after all, and have engaged the Collier’s team of Shaun Stiles and Katie Blasiar. Shaun and Katie have their work cut out for them. The way leasing is going there, now would be a good time to look at the option of converting the building to a hotel. The one bright spot for the building seems to have fizzled. Morton’s Steak house, rumored to have signed a lease for the ground floor space, is now rumored to be out of the deal.
Many of the office development projects on the books for Pasadena are having difficulty getting financing or are on hold:
33,000 ft @ 64-88 N Fair Oaks – waiting for construction financing.
153,000 ft @ 680 E Colorado– waiting for construction financing.
80,000 ft @ 254 E Union – waiting for market demand to return.
Green & Fair Oaks – back to the drawing board.
106,000 ft @ 550 E Colorado?
The bottom line is that large spaces (10,000 + ft.) and inflexible/not divisible spaces are going to be hard to move. There is still strong demand for the smaller 500-1,500 ft. space.
The next 6 months should be very interesting. We have definitely shifted from a “Landlord” market to a “Tenant” market. Class A rates may soften a bit but aren’t likely to come down significantly. Carlton Maese at The Pasadena Corporate Center retreated to $3.65/ft. after a brief flirtation with the “why not” $4.00 mark. We should start seeing more free rent and improved TI packages. The buildings that are going to be able to react to the market are the ones that haven’t sold in the last 2 years.