By Patricia Kirk | NREI Online
Los Angeles’ CBD office market has not experienced ups and downs in rents and vacancy rates like the city’s Westside and other local markets. Brokers and building owners attribute downtown’s consistency to a growing residential population and retail and cultural amenities, as well as the improving mass transit system, which includes rail, subway and bus rapid. All of these changes are helping downtown offices recruit and retain employees.
Los Angeles’ downtown has a population of 45,000, according to a 2011 demographic study by the city’s Business and Improvement District. Since 2000, more than 24,000 housing units have been created, bringing downtown’s total residential units to 28,861. The influx of residents has created a surge in restaurants, retail and entertainment venues.
“Downtown has an edgy feel to it these days,” says Michael Zietsman, managing director of Jones Lang LaSalle’s (JLL) capital markets group for the Southwest, and “the action” has moved there from Hollywood.
The opening of L.A. Live in 2007, a $2.5 billion, 5.6 million-sq.-ft. entertainment complex adjacent to Staples Center, moved it closer to being a 24/7 market. “The nightlife has made downtown L.A. an attractive alternative to Hollywood and the Westside,” says Tony Morales, managing director for leasing in JLL’s downtown office. Although residential starts have slowed down, he notes, an increasing array of amenities continues to attract both young and middle-aged professionals.
An Environmental Impact Report for a downtown NFL stadium proposed by L.A. Live’s developer, Anschutz Entertainment Group (AEG), is under public review. AEG also plans to expand the L.A. Live complex to include 332,618 sq. ft. of office space, a 269,182-sq.-ft. studio for a national cable television network, a 275-room hotel and a 25-story residential tower.
Additionally, the City of Los Angeles plans to renovate and expand the adjacent Los Angeles Convention & Visitors Bureau. And the Wilshire Grand Hotel will be demolished to make way for a 45-story complex including a 540-room hotel with condominiums on top and a 1.1 million-sq.-ft. office tower with a public plaza and shops. The project is being developed by Hanjin, Korean Airlines’ parent company, and Thomas Properties.
“There’s lots of excitement about the football stadium,” says Andrew Lustgarten, managing director of the downtown office of Studley, an international brokerage firm. “It would be a big win for downtown L.A. and really fuel the market—bring in lots of media and vendors.”
National architecture firm Gensler has been a vital part of the downtown L.A. transformation to a live/work/play environment and is the proposed architect for the new football stadium. Last fall, Gensler moved its Southern California headquarters from Santa Monica to downtown, signing a 12-year lease with Thomas Properties Group for the top two floors of the Jewel Box, a three-story building situated between the twin 52-story buildings Paul Hastings Tower and City National Tower at City National Plaza.
Gensler executives say its former location presented financial and commuting hardships for many of its 230 employees. In its new location, Gensler will enjoy lower rent and a three-year business tax holiday, which was adopted by Los Angeles to entice new businesses to locate there. Downtown is priced at about $3 per sq. ft., compared to $5 per sq. ft. on the Westside, says Jim Jacobsen, partner at Westside brokers Industry Partners.
Jacobsen, who specializes in Westside creative space, says professionals are looking downtown because the Westside’s supply of historic buildings is depleted while downtown still has a large inventory. He says creative types prefer the authenticity that downtown’s historic buildings provide and the energy created by downtown’s youthful population. “If the buildings exist, then creative people are willing to go there,” he says.
Rising Real Estate Partners has retained Jacobsen as its leasing agent to acquire the 450,000-sq.-ft. Pac Mutual building complex, at the financial district’s east end, to convert to casual office and creative space. The property will be repositioned as a lifestyle office concept, similar to San Francisco’s South of Market and New York’s Chelsea Market, says Chris Rising, president of The Rising Real Estate Group. “People today don’t necessarily work banker hours,” he explains. The project includes 40,000 sq. ft. of retail overlooking Pershing Square.
Revisions from the 1970s and 1980s will be stripped to expose bricks and concrete floors, says Reed Garwood, Rising’s executive vice president for asset management and development. Plans call for repairing the building’s terracotta and brick exterior and restoring the lobby. User spaces, which are currently 65 percent occupied, will be renovated as new tenants sign leases.
Green office space brings premium rental rates, and L.A.’s CBD is fifth in the U.S. for sustainable buildings. Nearly 6.9 million sq. ft., or 24 percent of its total office inventory, is LEED certified, and 21.5 million sq. ft. is Energy Star-rated.
“Most national tenants are committed to achieving LEED certification, and we’re doing whatever we can to help them meet those expectations,” says John Barganski, regional vice president, leasing for Brookfield Properties.
Brookfield is the second-largest building owner in downtown L.A., with three class-A assets totaling 3.4 million sq. ft. “We’re still in the early stage of recovery, but our overall 86 percent occupancy is outperforming the market by 5 percent,” Barganski says. He says 2011 was a great year for large lease deals in downtown L.A., and 2012 is expected to be even better. Last year, Bank of America renewed a lease for 175,000 sq. ft. at Bank of America Plaza (333 S. Hope St.), Cushman & Wakefield renewed for 55,000 sq. ft. at Figueroa at Wilshire (601 S. Figueroa St.), and Lockton Insurance renewed for 70,000 sq. ft. at Ernest & Young Plaza (725 S. Figueroa St.).
However, notes Morales, 75 percent of the vacant class-A space downtown is in buildings controlled by the big three downtown landlords-Brookfield, Thomas Properties and MPG Office Trust. “Downtown has all the metrics to be a tenant market, but is controlled by a select few landlords—Brookfield, Thomas Properties and MPG Office Trust—so there’s no downward pressure on rental rates,” he explains.
But the market may be turning in the other direction. “We’re starting to see the ownership consortium fractured by new owners coming into the market,” Morales says. Last year, for example, MPG sold 550 Hope Street, a 566,434-sq.-ft. property, to LBA Realty for an estimated $157.5 million. MPG Office Trust also gave Two California Plaza, a 54-story, 1.4-million-sq.-ft. building at 350 South Grand Ave., back to the lender because it was overleveraged with a $470 million mortgage.
Although CBD’s office occupancy has remained fairly stable, Lustgarten notes that class-A building owners might be getting $22 per sq. ft. but are offering massive concessions. “We’re seeing a lot of musical chairs,” he says, “and tenants are renewing leases but shedding space.” For example, Aon Insurance Company previously occupied six floors with 110,000 sq. ft. at 707 Wilshire, but renewed for four floors with 77,000 sq. ft.
The financial district also has a large inventory of historic buildings, and recently drew Price Waterhouse and law firm Morrison Foster from Bunker Hill. “This is an indication that the financial district is becoming more attractive,” Zeitsman says.
Historically, institutional investors have been cautious about committing to downtown, but the market’s growth over the last five years is attracting pension funds and other institutional investors. Offshore groups are also showing interest. The 1.4-million-sq.-ft. Wedbush Center at 1000 Wilshire Boulevard, for instance, attracted Canadian, Asian and European investors. Ultimately, a U.S. pension fund acquired it; however, says Zeitsman, “Foreign investors are clearly looking for assets in this market. It’s just a matter of time.”