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WESTERN SNAPSHOT, JULY 2005
West Los Angeles Office Market
Ocean breezes by themselves could assure the long-standing popularity of West Los Angeles, a group of privileged neighborhoods that enjoy the fresh air and blue skies that come with living near the beach. Popular with executives, high-end residential neighborhoods like Beverly Hills, Beverlywood, Marina Del Rey, Pacific Palisades, Rancho Park, Vista del Mar, Santa Monica and Westwood almost guarantee that west side office buildings will remain attractive to decision-makers who prefer to work near home. And although this office market has had its ups and downs, recent activity both in investment sales and in leasing transactions suggests that fortunes of the west side office market are definitely looking up.
As a whole, the vacancy rate for Class A space on the west side is 14 percent, compared to 20 percent in downtown Los Angeles and 18 percent citywide. In general, west side vacancy rates are shrinking, leasing concessions are becoming less generous and lease rates are inching up. Certain submarkets, of course, seem like islands unto themselves, such as Beverly Hills and Santa Monica, both of which have vacancy rates of only 5 percent. In Century City, the vacancy rate is a semi-soft 15 percent and may soon rise, due to the development of a new office building, the 790,000-square-foot 2000 Avenue of the Stars, as well as an existing 350,000-square-foot sublease in the MGM Plaza, left behind by the departure of anchor tenant and namesake MGM. The range for Class A rental rates in West Los Angeles runs from $2.25 to $4 per square foot.
Some spectacular leases have raised confidence in this sometimes-lackluster office market. The monster transaction of the past 6 months is Yahoo’s long-term lease of 256,000 square feet in Santa Monica’s Colorado Center, which is to be renamed Yahoo Center, in a deal reportedly worth about $100 million. In Century City, Creative Artists Agency made a pre-lease commitment to 180,000 square feet in the future 2000 Avenue of the Stars, a building that is due for completion in third quarter 2006. In Santa Monica, MTV, a unit of Viacom, renewed and expanded its lease for a total of 128,000 square feet at 2500-2800 Colorado Avenue in a 10-year deal worth $43 million. The landlord was Prudential Real Estate Investors.
Another noteworthy deal concerns Cedars-Sinai Medical Center, which signed a long-term lease renewal for 80,000 square feet at 6500 Wilshire Boulevard with WRC Properties, a unit of TIAA CREF. Proskauer Rose, one of the nation’s largest law firms, signed a lease renewal and expansion for a total of 54,000 square feet at 2049 Century Park East in Century City in a 15-year deal worth about $32.6 million. The biggest tenant currently canvassing for space is the William Morris Agency in Beverly Hills, which is looking for up to 150,000 square feet.
On the investment side, institutional-grade assets in the best locations on the west side are fetching record or near-record prices, abetted by continued low interest rates. Real estate investors are flush with cash, while a growing scarcity of desirable deals only tends to push up prices. Some notable deals include the sale of Corporate Point, a 204,612-square-foot office complex in Culver City, which was acquired by Scanlan Kemper Bard for $39.3 million from Slauson Associates. In Beverly Hills, the 84,000-square-foot 331 Maple Drive was sold by Praedium Group to investor John Benheim for $28.5 million. Also in Beverly Hills, the 87,000-square-foot Bank of America office building at 9440 Santa Monica Blvd. sold to a German pension fund for $31.2 million. One major tenant that has not yet found a home is Activision, which is in search for 300,000 square feet in West Los Angeles.
Development activity, long dormant on the west side, has been newly jumpstarted and has begun to add substantial inventory to the office market. The largest project is 2000 Avenue of the Stars, which is being developed by Trammell Crow in Century City on the site of the former ABC Entertainment Center. In Culver City, Arden Realty is expected to start construction shortly on a more than 200,000-square-foot speculative high-rise office building in its Howard Hughes Center. That decision makes good sense given that the existing buildings in the same center are 95 percent leased. On a smaller scale is J.H. Snyder Company’s The Crescent, an unusual combination of residential units and 40,000 square feet of office space in Beverly Hills, again being built on a spec basis. That comparatively small amount of office space in a single “jewel box” building may appeal strongly to an entertainment or creative firm looking for a high-identity location. Expect The Crescent to be fully leased by year’s end, helping to tighten the already thin office market in Beverly Hills. If demand continues its recent climb, developers may be more willing to build on a spec basis than they have in the recent past, at least as long as interest rates stay low.
For growth, keep your eye on the market that arguably has had the most explosive growth in the past 10 years: Santa Monica. The ocean-front city appears to be shedding its excess dot-com and technology space and will continue to experience tightening vacancy rates as lease rates rise accordingly. Another prediction: When interest rates rise and owners start selling off, watch for some great deals.
The short-term fortunes of the west side may hinge on such unpredictable factors as the movement of interest rates, the continued interest of the capital markets in commercial real estate and the relative health of the entertainment industry. As long as ocean breezes blow, however, the west side is a safe bet in the long term.
Gary Weiss is a principal with Madison Partners in Los Angeles.
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