11.09.2016

Santa Monica Office Rebound

by Daina Beth Solomon

Los Angeles Business Journal

Century City real estate investor Artisan Partners is set to close on the $400 million acquisition of the Lantana office complex in Santa Monica early next month, the latest in a series of transactions signaling a sharp turnaround for a market that has flagged of late.

The purchase, at about $825 a square foot, comes on the heels of nearby Colorado Center’s sale in July for about $863 a square foot. The two rank among L.A.’s priciest office sales in recent years and come as leasing activity is ratcheting up after a period of flux amid the boom of nearby Playa Vista.

Leases totaling several hundred thousand square feet are set to be signed in the next several weeks, according to brokers working in the market.

The pending deals – driven by major entertainment, media, and tech companies – are expected to tighten up a market that saw its vacancy rate climb to 19.5 percent in the third quarter, according to Jones Lang LaSalle. That, in turn, will push up rents and force larger tenants to move far afield if they want to expand.

“That market is night and day between 30 and 60 days from now,” said Rick Buckley, a principal at L.A. Realty Partners. “If you’re a tenant, you’re not going to have a lot of choices and you’re going to have higher rent.”

Most of the activity is clustered on the southeast side of the beachside city, an area roughly bordered by Broadway, Centinela Avenue, Olympic Boulevard, and 20th Street. The area includes two of Santa Monica’s biggest office parks – Colorado Center and the Water Garden. Buckley estimated that the vacancy rate in that pocket over the next couple of months will plummet from about 25 percent to 10 percent.

Other brokers familiar with market support that projection.

“There are probably close to 300,000 square feet of leases being signed as we speak,” said Carl Muhlstein, a regional director at JLL. “There are going to be a lot of announcements coming out in the next 45 days.”

Just which companies are putting their names on contracts has yet to be made public, but a few deals are already being widely discussed in local real estate circles.

‘Vital components’

Pharmaceutical company Kite Pharma Inc. is close to signing a lease for 160,000 square feet at Colorado Center, according to several sources. That would be a huge increase from its current Santa Monica headquarters of 20,111 square feet. Raymond Ritchey, senior executive vice president at Boston Properties, which purchased a 49.8 percent stake in Colorado Center for $511 million in July, declined to comment on Kite. But he did say that he is in talks with tech and media tenants interested in space at the 1.18 million-square-foot complex, which is 68 percent occupied.

“We anticipate we could be upwards of 90 percent leased by end of year,” he said.

Across the street, the 1.3 million-square-foot Water Garden is anticipating that 175,000 square feet could be leased by a major technology company, said CBRE Managing Director Pat McRoskey, who handles the project’s leasing efforts. He did not disclose the tenant’s name, but other sources said software giant Oracle Corp., which recently signed for 92,350 square feet in the project, is looking to expand its footprint.

Movie and TV studio Lions Gate Entertainment Corp., based at the 2700 Colorado office building, is looking for 60,000 additional square feet after acquiring Beverly Hills-based cable network Starz, sources said.

Online video network Hulu is also seeking to add about 60,000 square feet while remaining at Colorado Center. In addition, Red Bull and West L.A.’s Riot Games are said to be scouting for new space, and there is buzz that the Amazon Studios division of Amazon.com Inc., which already holds at least 75,000 square feet at the Water Garden, might be aiming for as much as 100,000 square feet more.

These deals would add to leases already signed in the area by other firms.

AwesomenessTV, a West L.A. production company owned by NBCUniversal, signed in July for 90,000 square feet at the Pen Factory, a former Paper Mate building being converted into offices.

Fitness video company Beachbody took an extra 69,000 square feet at its Lantana headquarters in May, bringing its total footprint there to 200,000 square feet. Artisan is acquiring the 480,000-square-foot complex from Atlanta investment firm Jamestown, which purchased the complex in 2013 for $328 million, or $677 a square foot.

The healthy economy combined with high-tech developments in the entertainment industry are pushing the growth of these companies in Los Angeles, said Matthew Miller, a managing principal at Cresa.

“Silicon Valley’s tech expansion is well-known, but L.A. is the nexus of the ongoing convergence of entertainment and technology,” he said. “As the way we consume media continues to evolve, L.A. has the vital components of content, talent, universities, capital, and quality of life.”

‘Rare unicorn’

Leasing action is beginning to shift back to Santa Monica now that neighboring markets have filled up – largely with companies that fled Santa Monica to find bigger spaces at cheaper rates. Culver City and West Los Angeles are tight, and Playa Vista is nearly fully leased.

“It’s been a seesaw effect between Playa Vista and Santa Monica,” said CBRE’s McRoskey.

Reflecting those moves, Santa Monica’s vacancy climbed steadily since the third quarter of 2013, from 9.6 percent to 19.5 percent at the end of the last quarter, according to JLL data. The market gave back more than 203,700 square feet in the third quarter, fed in part by direct marketing company Guthy Renker’s move to El Segundo that left 84,000 square feet available at the Santa Monica Business Park.

But Santa Monica might soon reach its limit with new leases in the works and only two new office projects under development.

One, Pen Factory, owned by Clarion Partners and Lincoln Property Co., is already about half-leased after the AwesomenessTV deal, leaving 140,000 square feet, said L.A. Realty Partners listing broker Buckley.

Santa Monica Gateway will offer 200,000 square feet, according to JLL’s Muhlstein, who is marketing the project for developer Jack Walter. The construction costs for both projects are well above $100 million.

The planned Martin Expo Town Center at Olympic and Bundy Drive just outside of Santa Monica would add an additional 200,000 square feet of office space.

David Binswanger, executive vice president at Lincoln, said it’s unlikely that Santa Monica will see any new offices available for at least six more years. Developers typically need three years to acquire and entitle land, and another three to design and build a project. Even on that time frame, Binswanger doesn’t anticipate much new development.

“There are few developers that are well-capitalized enough and patient enough to embark on a blind entitlement process in any of the western submarkets, specifically Santa Monica,” he said. “That’s a very rare unicorn to find.”

‘Not musical chairs’

Without room for spillover in neighboring markets of Playa Vista, West Los Angeles, or Culver City, tenants might begin looking farther afield, possibly to emerging creative-office hot spots in El Segundo or downtown’s Arts District, Binswanger said.

Although those moves have yet to play out, what’s certain for now is that growth is strong.

“It’s not musical chairs, it’s real, positive absorption,” said Brad Feld, a vice chairman at Newmark Grubb Knight Frank.

A spike in rents could come next. Office rents in Santa Monica are already among the highest in the city, with rates around $5.50 a square foot, he said. It would be possible for them to jump to $6 or $7 a square foot – or as high as $8 in downtown Santa Monica. That would be on par with just a few previous rent spikes in the area.

“I don’t see it as frothy,” Feld said. “Based on the fundamentals of the economy and supply and demand, I think it’s very rational and healthy.”