Commercial Real Estate Inventory Nearly Depleted in Pasadena

Published : Monday, March 20, 2017 | 5:21 AM

Pasadena has seen steady growth in both commercial and residential property values, but the continuing demand especially for commercial rental space has resulted in available space getting hard to come by.

Although office space demand statewide has flattened and demand for retail space has been decreasing, both city authorities and real estate brokers agree that Pasadena is running out of available commercial real estate.

They also agree that as more foreign investment flows into Pasadena, more commercial inventory needs to be created so that in the long term, demand can be satisfied.

“My feeling is that we are, if not in the bubble, we’re approaching the bubble, based on my experience in the last couple of downturns,” said real estate broker Hoss MacVaugh. “Our vacancy is at a very low rate, like in the last downturn. We’re not really building any new commercial spaces at this point.”

MacVaugh is the principal of MacVaugh & Co. Commercial Real Estate Services. Established in 1994, MacVaugh & Co. has developed expertise in the I-210 Foothill Freeway corridor in the San Gabriel Valley, concentrating on Pasadena and the neighboring cities of South Pasadena, San Marino, Alhambra, and Arcadia, and the town of Altadena.

MacVaugh says there is an estimated 12 percent vacancy rate in Class A office space in Pasadena, but for Class B and Class C, the rate has shrunk to six percent. There’s almost no inventory, he said.

Pasadena Economic Development Manager Eric Duyshart said last week the decreasing availability of commercial rental space is due mostly to an oversubscription of retail space.

“On the commercial side, we’ve seen continued demand from people wanting to buy land in Pasadena,” Duyshart says. “Even though our vacancy rate is still recently good and better than most cities, the long term prospect for commercial storefront space is fairly flat to declining.”

Duyshart acknowledged that commercial real estate purchases or rentals help maintain the City’s budget through property taxes. He said he does not believe the decline in available inventory could worsen an impending budget deficit for the City in the next year or two.

“Yes, the increase in property values and property taxes is an important slice of the local revenue pie,” Duyshart says. “The sales tax is also an important slice, and that has been stable. It has not been a dramatic growth but we’re holding our own in Pasadena compared to other cities.”

Duyshart pointed out that the local business community is collaborating with the City to maintain Pasadena’s attractiveness as an investment destination, and is helping improve the “shopping experience” in the City, which he said is crucial to economic growth.

Commercial real estate broker Dave Augusto from the Pasadena-based Elifant Group is apprehensive that Pasadena could run out of commercial space in the medium term, even with prices continuing to increase. He attributes this to an influx of investments from Asia, and especially from China.

“I think there’s going to be a lot of foreign investment sustaining a big growth in commercial real estate,” Augusto said. “The demand is always going to be there, but obviously inventory is going to be low, which is pushing prices up, and foreign investors are more willing to pay that premium, specifically in the commercial and industrial sector.”

Augusto said the price per square footage for commercial space has increased at least 25 percent over the last year, and much of this has been because of foreign investments, in his view.

Asked if it would still be wise for businesses to invest in developing commercial real estate in Pasadena, the brokers agree the City continues to maintain its attractiveness in this field.

“Commercial real estate in Pasadena has always been a good investment.” says MacVaugh. “Now I say, if you buy something, as long as you can afford to hold on to it for ten years, it doesn’t matter how much you paid for it. It will end up being a great investment.”

Augusto’s firm has been doing business in other parts of the San Gabriel Valley, but for many reasons, investors he said, still prefer Pasadena.

“Pasadena is ideal,” Augusto says. “Recently, I’ve been dealing with a lot of foreign investors, and majority of them have been asking for commercial real estate in Pasadena.”

Augusto says with the high demand, the City shouldn’t even worry about the impending budget deficit, and instead should focus on increasing the inventory for commercial space, either for rent or for purchase.

“If the city runs a deficit, I don’t think that’s a huge problem,” Augusto said. “In terms of commercial real estate being a hot area of the city where investors are constantly looking to buy, the demand is always going to be there. It’s just a matter of inventory.”

Augusto also pointed to two major issues that are affecting the availability and the price of industrial space in Pasadena.

“One is the Asian market where they need space for textiles and imports and exports, and the other is the marijuana sector that’s going around sucking up all the industrial space because they’re growing or cultivating,” Augusto said. “Because of those two major demands putting pressure on inventory, all the space is disappearing.”

Augusto said with the Asian market and the marijuana market applying so much pressure on commercial real property prices and pushing them up, the average mom and pop business is getting squeezed out or is forced to pay a premium to keep their business going.

Market pressures leads back to the subject of how to stimulate commercial real estate growth in order to make more space available.

For Duyshart, the City needs to continue providing good value for shoppers and investors alike.

“I think with the continued increase in sales through the internet, Pasadena and other communities, to attract customers, have to focus on providing quality experiences, where people see a commercial street as a destination not just for standard shopping but also for a place to go eat and hang out,” Duyshart says. “When people are going out for more than an hour or two to shop, they want to make sure that they have a unique experience. And that’s where Pasadena’s more authentic shopping experiences are an advantage.”

Duyshart adds that storeowners should continue to connect with their customers through mobile apps and other modern devices that help consumers connect with opportunities and bargains at the commercial districts in Pasadena.

For MacVaugh, he says the City must consider its zoning regulations and innovations as a major factor in improving the commercial space inventory.

“Zoning is the answer. And increase density. Reduce development fees. Really that’s the answer,” MacVaugh says. “Pasadena has a reputation of being difficult to deal with, as far as City Hall is concerned. So if there’s anything they can do to not only be perceived as easy to deal with but also actually be easy to deal with, that would help.”

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