Clean Sweep
After being courted by landlords and local governments throughout the last recession, small industrial companies are quietly being shown the door in several of the region’s most thriving real estate markets.
Taking over the space--and paying much higher rents--are entertainment and high-tech businesses that spurn traditional glass offices for the casual cool of concrete and brick. Civic boosters usually welcome the new “clean’ businesses, but market observers say cities and landlords are taking a risk by turning their backs on small manufacturers.
“They’re really putting all of their eggs in one basket,” said Greg Geraci, an industrial broker for CB Commercial Real Estate Group.
One of the changing markets is Santa Monica, where small direct mailer Exec-U-Mail was priced out of its home almost two years ago. Months before the lease on the company’s warehouse was set to expire, the new landlord approached President Mike Franz and warned him that he’d better start looking for another place to do business. The owner was planning major renovations and figured on doubling the rent too.
“He said he was directing the building and its use toward the post-production companies that had started moving to the Westside,” Franz said. “We couldn’t compete, so we had to move out.”
Although the direct-mail firm’s former building on 21st Street was relatively plain, it possessed a few of the touches that entertainment and technology firms clamor for, like bow truss ceilings and plentiful parking. As soon as Exec-U-Mail moved out in mid-1996, the landlord began the building’s make-over, adding new windows and a skylight. Months later it was snazzy enough to attract Immortal Records, an affiliate of Sony Music, as its new tenant.
Over the past few years, many smaller industrial firms like Exec-U-Mail have been forced to leave their digs in Santa Monica, West Los Angeles, Culver City and Burbank as landlords of squat, utilitarian buildings have begun wooing hipper tenants.
Plain structures that once housed machine shops, auto-repair stalls and assembly firms are now garnering monthly rents of $1 to $1.35 per square foot unimproved, more than most industrial firms can afford to pay, said David Wilson, a Westside broker with Lee & Associates. Other manufacturers who owned their buildings have simply opted out, selling their properties for a hefty profit and moving their operations to more affordable locales.
It’s a sign of high economic times, analysts say, when the manufacturers and industrial firms that many cities tried to court in the early 1990s are once again trickling out uncontested to markets where rent is cheaper and business regulations more relaxed. Some even leave the state.
“When there is a strong attachment to Southern California, a firm will probably stay,” said Stephen Cauley, director of the real estate program at UCLA’s Anderson School. “But given the economic [demands] of Los Angeles, there is a tendency for people to leave. How is a manufacturing firm in L.A. going to compete with the same firm in Arizona?”
Entertainment and technology firms began making their mark in desirable industrial districts when real estate was slumping, brokers say.
“When rents and property values showed significant declines, a lot of users that were formerly located in Hollywood and the Mid-Wilshire area saw an opportunity to move west,” closer to executives’ homes in such neighborhoods as Brentwood, Pacific Palisades and Malibu, said Joe Palazzolo, a broker with Grubb & Ellis Co.
Soon the upscale tenants began to cluster around one another, creating enclaves of entertainment and high-tech companies. Now, long after the cheap leases expired, these enclaves have gained cachet that many chief executives feel justifies the higher rents.
“These guys have so much money, their only concern is creating the culture they need, the environment in which their employees will be happy,” said Steaven Jones, the owner of 10 such buildings in Santa Monica, including Franz’s former location.
And with the economy on the upswing, analysts say municipalities can afford to shun small manufacturers and industrial firms in favor of so-called “clean” businesses like software developers and ad agencies. These firms produce less noise and waste, tend to increase property values and bring in workers who have more money to spend, Cauley said. One of the most aggressive cities has been Santa Monica, which amended zoning ordinances to allow white-collar tenants to move into buildings once limited to manufacturing uses.
Franz says policies like these are putting the squeeze on industrial firms like his and driving prices up. His company opted to move to a business park in Marina del Rey, an area that was cheaper than Santa Monica but still relatively close to many of the firm’s customers.
“We felt like we were part of the community when we were in Santa Monica,” Franz said. “But now you wouldn’t look in that area and find my kind of business anymore.”
Although he’s happy with the company’s new building near an old boatyard, he fears that when his lease comes up for renewal in five years, he’ll be in a similar bind. The proposed Playa Vista entertainment campus is less than a mile away, and technology firms have already begun sprouting up close by.
In fact, after prices started getting too high in Santa Monica, landlord Jones began buying in Marina del Rey, or, as he calls it, Media del Rey.
“Who knows?” Jones said with a laugh. “We may kick [Franz] out again.”
With entertainment and technology firms rapidly expanding in many Los Angeles-area markets, cities and economic development organizations can afford not to worry about losing a few industrial firms.
So, brokers say, not many communities have a handle on exactly who is leaving. Few bother to tally the smaller firms they lose, just the large firms they gain. Many small companies slip away unnoticed to areas like the San Gabriel Valley, the South Bay, the Inland Empire and Ventura County.
A company that makes fasteners for the space shuttle was forced to leave Burbank last year after failing to find space for expansion. Burbank offered low-cost financing as it courted the growing, 40-employee firm for a site near Burbank Airport in early 1994, after M.S. Aerospace’s Sylmar plant was ruined by the Northridge earthquake. But the expansion of neighboring entertainment companies and their vendors made finding expansion room difficult.
“We drew a complete blank. There was nothing even close to affordable we could find in the Burbank area,” said Jim Cole, M.S. vice president.
He said his firm’s only Burbank alternative was to build, which he figured would have cost 40% more than moving into space they were considering in the east San Fernando Valley.
So they packed their bags and headed back to Sylmar, where they rented a building that is twice as large as their old one.
“The city of Burbank has not been trying to maintain these people because right now they are in a no-lose situation,” said CB Commercial broker Geraci. But, he cautions, Burbank and other cities could be in for a reckoning if their favored industry takes a big economic hit, as aerospace did in the 1980s.
Likewise, skeptics ask, in five or 10 years, will those neighborhoods and industrial buildings hold the same appeal for fickle entertainment and tech firms that they do today? Or might a new mecca emerge?
