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Reading the Future From Developments in ’89 : Offices: More towers are on the way downtown. But prospective Westside tenants are feeling sticker shock.

<i> Galperin is a Los Angeles-based free-lance writer who has covered the commercial real estate scene for several years</i>

The next decade. What might it portend for the Southland commercial scene? Will builders and investors continue to make loads of money? Will foreign investors keep coming? Will traffic, crime and pollution stymie commercial development?

Such are the multimillion-dollar questions everybody would like clear answers to. While few can tell the future with certainty, a look back at 1989 may provide some hints of what the 1990s have in store for Angelenos.

Downtown

A new skyline started to emerge in 1989 with the opening of the 73-story First Interstate World Center, across from the Central Library, and Arco Center, just west of the Harbor Freeway. The move of developers to west of the city’s core is expected to continue with several new towers proposed.

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Topping out in 1989 were Figueroa at Wilshire and 865 S. Figueroa--both set to open in 1990. Also under construction are the 550 South Hope, Two California Plaza and the 777 Tower office buildings--each touting premium views at premium prices.

Figueroa Plaza’s North Tower is on line for 1990 too, and First Interstate World Center developer Maguire Thomas Partners is already at work on yet another office building--Gas Company Center at 5th and Olive streets.

With new buildings up to 80% pre-leased, there’s no lack of projects in the pipeline. Five-year-old office buildings are beginning to look ancient to some tenants, however, and building owners are increasingly saddled with sublease tenants as law and accounting firms “move up” to newer and more prestigious space.

As a new decade begins, look for the refacing of 811 Wilshire Blvd.; start of the Michael Graves-designed Metropolis project in what’s known as downtown’s South Park area; and start of Los Angeles Center--a $1.5-billion mixed-use project proposed for a site west of the Harbor Freeway.

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Harry Macklowe Real Estate, Ahmanson Commercial Development and Mitsui Fudosan each are developing plans for a block anchored by the 818 West Seventh building. Macklowe plans a hotel and conference center. The neighbors each would like to build another office building.

Two blocks away, Pacific Atlas Development Corp. has plans of its own for offices and a hotel. Raffi Cohen Industries Inc. and Melvin Simon & Associates Inc. are working on the completion of Figueroa Plaza, along with One Civic Center for completion in 1991 and RCI Tower for 1992 or 1993.

Construction activity is keeping contractors busy all over downtown--except perhaps where it is most needed. Work started this year on a massive addition to the Los Angeles Convention Center.

But plans for an adjacent hotel have languished with financial troubles at Calmark Commercial Development, handpicked by the Community Redevelopment Agency to build a behemoth 1,781-room hotel along Figueroa Street. The delays have city officials worried as it becomes evident that a new convention center with no new hotel rooms may make for no new convention business.

The Westside

Sticker shock hit prospective office tenants in 1989. Lease rates at the two new towers of Westwood Gateway are up to $48 a year per square foot. That’s a number that has most tenants balking--as they opt for relatively less expensive downtown space or play a waiting game with developers in the hope that lease rates will soften a bit.

Builders had hoped that the prospect of controlled growth under Proposition U would spur tenants to get new space while the getting is good. The rush to expand office space hasn’t panned out, however--at least not yet.

New to the Westside in 1989 were the Westwood Gateway on Santa Monica Boulevard and Executive Tower on Olympic Boulevard--both high-end office buildings. Joining them soon will be 1999 Avenue of the Stars in Century City, Center West on Wilshire Boulevard in Westwood and Landmark II at Wilshire and Bundy Drive in West Los Angeles.

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Santa Monica--a city known to most people as unfriendly to developers--ironically will be the home to more than 4 million square feet of new office development in the next three years, or nearly half of the office space throughout the Westside.

Included in that figure is the 1.26-million-square-foot Water Garden being developed by J. H. Snyder Co. and Miller-Klutznick-Davis-Gray Co. Jerry Snyder is best known for his successful Wilshire Courtyard project in the Miracle Mile area, and he has plans for what would be the area’s first new office tower in more than a decade. Next to the Courtyard stands the CalFed building--and rumor has it Snyder may be buying that too. His staff would neither confirm nor deny the report.

“Boutique” office buildings are the in word all over the Westside. You know the kind--three stories with subterranean parking and a stepped-granite facade. Beverly Hills developers seem bent on elevating these projects to an art form with such names as the “Masterpiece Collection” by Columbia Development Partners, which wants to eventually have eight high-end boutique office projects along Wilshire Boulevard.

Despite three-story height restrictions, 1989 was a banner year for Beverly Hills, marked by construction activity at more than a dozen sites. Brokers are now hoping that 1990 proves an equally banner year for leasing as they compete to fill a glut of office space.

Overall, predict analysts at Grubb & Ellis Commercial Real Estate Services, vacancy rates for Westside office space are expected to rise to about 15% during the first nine months of 1990. By the end of the year, however, vacancies are expected to dip to 14% as the supply of new office space begins to slow.

San Fernando and San Gabriel Valleys

Suburbia isn’t what it used to be. Glendale is already the third largest financial center in California, and new construction will boost its office building inventory by a whopping 30% in 1990. In 1989, Pasadena’s inventory of office space was up 25%.

In the East San Fernando Valley, vacancy rates at year-end were but 8%, thanks in most part to the entertainment industry, reports Grubb & Ellis. Areas such as Sherman Oaks and Encino posted about a 12% vacancy rate. West Valley landlords continued to suffer in 1989 from an out-migration of technology-related firms. In fact, there were more tenants moving out of the area in 1989 than there were tenants moving in. The trend is expected to reverse, however, in 1990.

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Pasadena, Glendale and Burbank continue to attract office tenants from other parts of the Los Angeles area, and parts of the San Gabriel Valley have started to do the same. While the San Gabriel Valley commercial scene continues to be dominated by industrial buildings, projects such as West Covina’s Eastland Tower have raised the region’s profile as a desirable location for office tenants too.

Lease rates are still relatively cheap, and unlike the San Fernando Valley, parking is plentiful and usually free.

South Bay and Long Beach

Landlords are trying to recover from what could best be described as the South Bay slump. Aerospace and defense firms made deep cuts in their operations in the late 1980s--creating a glut of office and light-industrial space. Vacancy rates, according to Grubb & Ellis, were in the 20% range at the close of 1989, so owners continue to offer generous concessions to prospective tenants.

The South Bay industrial market, however, could not be doing much better. Demand is strong, vacancies are very low, prices are up.

In Long Beach, plans are afoot for a whole new skyline. A new hotel is planned alongside Phase 1 of the World Trade Center. The 25-story Landmark Square office tower is being developed by Cushman Investment & Development and Asahi Urban Development. Plans are also under way to transform the former Long Beach Pike amusement park into a $1-billion mixed-use community. In 1989, 188,000 square feet of office space was added in Long Beach and vacancy rates at the end of the year were under 9%.

Orange County

“Overbuilt” was the consensus among real estate executives as 1989 came to a close. Vacancy rates for office space are more than 20% in North Orange County and in the John Wayne Airport area. In Costa Mesa, vacancies were as high as 25% in 1989.

Irvine made a recovery from almost a 24% vacancy rate to somewhere in the range of 18%. Orange County’s most popular development centers experienced some of the county’s highest vacancy rates.

Completed in 1989 were the Koll Center Orange Business Park, the 12-story Stadium Towers I in Anaheim, Irvine Plaza, South Coast Corporate Center in Costa Mesa, Phase 2 of Griffin Towers in Santa Ana, Newport Place in Newport Beach and Metro Pointe in Costa Mesa.

Urbanization seems to be the word for the 1990s in Orange County. Irvine has grand plans to create a more dense urban environment, replete with public transportation and pedestrian-oriented plazas.

Big-name law and accounting firms are filling high-priced office space in bigger and bigger chunks. With housing at a premium, however, employers are a bit worried about recruiting office workers who now often commute from the Inland Empire.

Inland Empire

It’s tough to describe the growth of San Bernardino and Riverside counties without sounding like a chamber of commerce booster--the statistics are indeed staggering. An annual growth rate of 30% seems almost commonplace for some communities. Office development is still in its infancy compared to Los Angeles and Orange counties. Industrial development, however, is going gangbusters.

Moderate home prices and nearly new freeways account for much of the region’s growth. The Ontario airport is already one of the nation’s busiest for freight shipments. And, the Inland Empire’s western area has attracted such tenants as State Farm Insurance, Michelin, Hyundai, BMW, Bank of America and Ford Manufacturing.

For now, most office projects in the region are small-scale. Watch for start of bigger and more expensive developments in 1990, however.

Industrial condominiums may be the thing to watch in 1990, as land prices climb and investors find it more profitable to subdivide hangar-like buildings into smaller and more expensive spaces.

Industrial landlords found it harder than ever in 1989 to break even on their properties as rents failed to keep pace with land and operating costs. The logical solution for many has been to sell out to tenants.

Retail

Bigger was better in the 1980s. Dozens of major malls sprouted throughout Southern California, complete with anchor department stores or major supermarket chains. But land in 1990 is a precious commodity.

Culver City has plans for a major mall and the Westside Pavilion has been battling to add space too. Otherwise, the focus on retail development--on the Westside and elsewhere--seems to have shifted to two- and three-story “maxi-malls,” alternatively referred to as oversized mini-malls and “contemporary retail concepts.”

Retail vacancy rates in most of the basin remained in the single digit in 1989, reports Grubb & Ellis. Rents have just kept pace with inflation, and tenants are beginning to worry about a possible downturn in the economy.

Expect large-scale retail projects in the Inland Empire, Porter Ranch, South Bay and South Orange County areas. Parts of the Simi Valley too, say retail watchers, are a good bet for 1990.

Hotels

Who could let 1989 pass without mentioning the record-setting $1 million a room paid by Japanese investors for the Hotel Bel-Air? Japanese investors also bought the Biltmore Hotel in downtown Los Angeles and continue to show great interest in resort and country club properties in the Southland.

Calculated on the basis of cash flow alone, these investments don’t make much economic sense. Investors, however, are betting on continued appreciation over the long term.

Loews Santa Monica Beach Hotel opened its doors in 1989, and so too did the refurbished Regent Beverly Wilshire Hotel in Beverly Hills. Santa Monica and Beverly Hills have new luxury hotels slated for completion in 1990 and 1991, as do Marina del Rey and Long Beach.

Long known for little more than the Queen Mary and Spruce Goose attractions, Long Beach is approaching adulthood with grand plans for hotels, offices and new high-rise residences. Foreign investors, especially, have targeted the city as a spot to watch in 1990.


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