EToys Drops Option But Westside Market Still Strong

Online retailer EToys Inc. will not exercise its option to move into the planned third phase of the Westside Media Center in Los Angeles, but developer Kilroy Realty Corp. says it will construct the office building anyway.

Santa Monica-based EToys will move its headquarters to the 150,000-square-foot second phase nearing completion at the southwest corner of Olympic Boulevard and Bundy Drive. Though details of the 11-year lease haven’t been disclosed, real estate brokers estimate EToys will pay $35 to $40 per square foot annually.

Jeffrey Hawken, Kilroy chief operating officer, confirmed last week that EToys will not take more room. However, Kilroy will start work this year on phase three, he said.

The decision to build more space in the face of Wall Street’s recent pullback from tech stocks has predictably raised questions about the Westside office market’s continued expansion prospects.

But few buildings are under construction there, and Hawken said Kilroy expects the Westside to continue to generate profitable rents for landlords.

He said companies are searching for at least 2 million--perhaps as much as 3 million--square feet of office space on the Westside.

“We’re already seeing great activity” based on early negotiations with prospective replacement tenants, he said. He added that lease deals under discussion at some of the top buildings nearby in eastern Santa Monica are nearing a historic high of $50 per square foot annually.

The latest measurements of market dynamics seem to support Kilroy’s plans. Mid-year statistics from Grubb & Ellis Co. show that the Westside’s overall office tenant base has increased by nearly 1 million square feet this year, with vacancies falling to a tight 5.8% from 9.8% a year earlier. The West Los Angeles submarket is even tighter at 4.5%, with nearby Santa Monica at a squeaky 1.7%.

Rents for office leases negotiated in the second quarter in West L.A. averaged a hefty $35.50 per square foot annually. And Santa Monica boasts the region’s highest average office rents at more than $41--a jump of nearly 9% from the first quarter, Grubb & Ellis reports.

Westside office development is relatively tame compared with the 1980s boom, but Kilroy does face some competition in spite of signs of a slowdown in demand in the wake of Wall Street’s pullback.

Texas-based developer Hines Interests is finishing a 61,000-square-foot building at the nearby Lantana Center on Olympic. Hines is also planning two more buildings totaling more than 200,000 square feet. MaguirePartners of Los Angeles has launched a project with about 90,000-square-feet along the Santa Monica oceanfront.