El Segundo’s Office Market Roars Back
Developers of the newest office building in El Segundo have signed their first tenant, sealing a deal that signals how completely the El Segundo office market has reinvented itself, turning in just a few years from one of Los Angeles County’s weakest office markets into one of its strongest.
Development partners Summit Commercial Properties Inc. and Mack-Cali Realty Corp. have signed Regus Business Centres, an international business services firm, to a 40,000-square-foot lease in Continental Grand Plaza II, the first new speculative office building in El Segundo since the recession.
Building office space without having any tenants already signed would have been unthinkable in El Segundo just a few years ago, according to Jack Mahoney, president of El Segundo-based Summit Commercial.
“When we bought our first building here in 1991, the vacancy rate in the market was well over 30%,” Mahoney said. “Some of the other buildings were vacant, but they had defense firms that were still paying $2 to $3 a month per square foot in rent on long-term leases they had signed years before.”
The fact that defense firms were paying for space they had vacated meant that although landlords technically were still collecting rent, the defense slowdown had pulled the rug out from under the El Segundo market and there were no replacement tenants ready to take what aerospace left behind.
Exacerbating the problem was that aerospace companies tended to prefer low-rise buildings with huge floor plates of 100,000 square feet or so--buildings that are expensive to convert for use by other types of office tenants.
Demand grew to the point, however, that many of those buildings have been converted to multi-tenant use, as a host of other types of businesses have stepped in to fill the defense space.
The El Segundo office vacancy rate has dropped dramatically as software developers, hardware manufacturers and distributors, and telecommunications companies have snapped up empty space.
Vacancy now stands at about 11% overall for the 10 million square feet of office space in El Segundo, according to Grafton Tanquary, a CB Richard Ellis broker. The vacancy rate for Class A space is about 8%, including Summit’s new building, he said.
There is no exact rule to determine when the time is right to build speculative office space. Developers and brokers say it’s usually driven by a combination of a relatively low vacancy rate--in the 10% range--and a perceived demand for more space in the area.
But those following the El Segundo market firmly believe that it has turned around enough to justify new construction.
“We estimate there are users looking for half a million square feet of office space in this market, and we only have 200,000 square feet left to lease,” Mahoney said. He said Summit and New Jersey-based Mack-Cali expect their new office building to be more than 60% leased when it opens in mid-June, at asking rates of $2.50 per square foot per month.
Gary Weiss, a broker with Julien J. Studley Inc., called this “an ideal time for spec space.”
“This is one of the markets that has gotten healthiest fastest--almost literally overnight,” Weiss said.
The quick turnaround is reflected in rental rates, Weiss said, which have climbed to more than $2.25 per square foot per month recently in buildings that were asking only $1.80 per square foot 18 months ago and $1.60 two years ago.
“Most of the Class A space is gone, which is why Summit is going to do well with its new building,” Weiss said.
According to Tanquary, the re-engineering of the El Segundo office market is the result of several factors.
First, timing was in its favor.
“The aerospace companies turned off the faucet just about the same time Santa Monica and some other parts of the Westside got very pricey,” he said.
At the same time, Tanquary said, a variety of rapidly growing technology companies were looking for space, many of them seeking quarters for regional sales and marketing offices.
“These tend to be high-revenue, low-margin companies, so most of them would rather not be in the city of Los Angeles if they don’t have to, because L.A. has a gross receipts tax,” Tanquary pointed out. “El Segundo only has a head tax, which makes it much less expensive for companies like this.”
The El Segundo tax is a flat $88 yearly for companies with fewer than 10 workers and $88 plus $109 per worker for those with 10 or more workers, Tanquary explained. The gross receipts tax in Los Angeles ranges from about 1% to 4%.
“If you have high revenues but not a whole lot of people, you can save a lot of money by locating someplace like El Segundo instead of L.A.,” he said.
El Segundo also offers a labor pool of engineers and other skilled workers who were laid off by the aerospace industry, Tanquary continued, and the residential areas of the nearby beach cities appeal to the engineers and executives that many of the high-tech companies are courting.
The changes in the corporate makeup of the area are also reflected in new shopping centers, retail shops and restaurants courting the new executives and workers of these companies, Tanquary added.
“Out goes a surf shop and in goes Armani,” he said.
Still another factor driving the market is its growing popularity with service firms like Ernst & Young, Andersen Consulting and Deloitte & Touche, all of which now maintain offices in El Segundo. Tanquary’s own firm, CB Richard Ellis, recently moved its executives into 15,000 square feet in El Segundo, although the company maintains brokerage offices throughout the region.
As with others, he said, CB moved to El Segundo so executives who travel frequently could be close to Los Angeles International Airport.
According to Mahoney, El Segundo now has “probably one of the largest concentrations of Fortune 500 companies in the Los Angeles area.”
He said today’s companies probably couldn’t have moved into the old El Segundo, however, because defense firms in their heyday snapped up every square foot of space that was available.
According to Studley’s Weiss, some of those same defense firms remain in the market, having reinvented themselves as consumer electronics companies. He said a number of them, in fact, are growing and once again looking for space.
