Wallflowers in a Hot Market

Some office buildings are born empty. Others have emptiness thrust upon them by such forces as age, neglect, legal squabbles or stubborn owners.

It’s understandable that office buildings would empty in periods like the recession of the early 1990s, when demand for office space dropped from a torrent to a trickle. But what’s puzzling to passersby is how some properties could remain vacant in the best of times and in the best of real estate markets.

Take Santa Monica Gateway, a nine-story office building on Santa Monica Boulevard at the San Diego Freeway in West Los Angeles. The vacant green and black tower has been snickered about since it was built in 1986, though new owners hope to give it life at last.

Although there are some common themes for such vacancies, brokers and landlords say, there is no single explanation because each building has its own story.

The Gateway building, for example, remained unoccupied because construction was halted when the structure was about 90% complete. It became the object of a long-lasting lawsuit between the building’s developer and the construction lender, said broker Chris Houge of Insignia/ESG.

The lender ultimately foreclosed and sold the building in 1994 to a trust, Houge said, but construction remained unfinished until after the trust sold the Gateway to Spieker Properties in January 2000. Spieker completed the construction of the building in December. The work included extensive renovations and remodeling.

In El Segundo, a 157,000-square-foot office building at 2300 Imperial Highway and an 86,000-square-foot building at 898 N. Sepulveda Blvd. sat vacant for at least six years, even though the area had recovered from the defense industry slump. The area became such a popular office market that some developers built and fully leased office towers while existing buildings sat empty.

The building at 2300 Imperial was vacant first because El Segundo’s office market still was suffering from the aerospace downturn and later because the family trust that owned the property took years to decide what to do with it after the trust’s namesake died, said Jeff Trenton, president of West Los Angeles-based Proficiency Capital, which bought 2300 Imperial in 1999.

Proficiency renovated the building inside and out and had it fully leased within a month or two of completing renovations last year.

At 898 N. Sepulveda, owner Legacy Partners completed a full renovation last year after acquiring the property in December 1998, said Steve Center, Legacy’s vice president of leasing. The building is 50% leased, and the rest of the space is committed or in lease negotiations, Center said.

The 898 building was a sound structure with a steel frame and ceilings high enough (9 feet) that it was worthwhile to renovate, Center said. Its main drawbacks were inadequate building systems--heating, ventilating, air conditioning, sprinklers, elevators and the like--but Legacy has replaced or renovated all of them, Center said.

Legacy also owns a neighboring building at 888 N. Sepulveda, but that property has unusually low ceilings (8 feet) and poured concrete structure that is less amenable to extensive renovations, Center said. Legacy hopes to obtain approval to raze the vacant 12-story dating from 1969 and replace it with a six-story, 120,000-square-foot structure.

That 1-foot difference in ceiling height might seem negligible, but it can mean the difference between feeling cramped and feeling comfortable, said Steve Solomon, a Colliers Seeley International broker, who said low ceilings are a common drawback in some older buildings.

Casual observers may wonder how owners can afford to leave buildings vacant, but doing nothing can be a successful strategy, experts say.

Owning an empty office building costs about $2 to $3 per square foot per year for taxes, insurance and other expenses, Center estimated, yet an office property can easily rise in value by many times that amount each year in a good real estate market. A landlord who owns a building outright, with no mortgage to pay, often can afford to leave it empty and sell at a profit a few years later.

Buildings often are empty because their elevators and other systems are outdated, so any attempt to find tenants might require more time and expense than an owner wants to invest, said Trenton of Proficiency Capital.

“It’s complicated, it’s expensive, it’s time-consuming and you lose a lot of brain cells doing one of these [renovation] projects,” Trenton said. “It’s not something that everybody wants to tackle.”

Owners who shun expensive renovation projects often wait for buyers like Proficiency or the Van Nuys-based affiliate of Decron Corp., which acquired 5757 W. Century Blvd. in Los Angeles. The 5757 property struggled for at least 10 years before David Nagel’s firm bought it, said Solomon, who brokered last year’s sale of the two-building, 488,000-square-foot property.

The project was developed in 1982 with the aerospace market in mind, noted Solomon. He said the complex was part of the overall collapse of the Century Boulevard market, which was 35% vacant for much of the last 10 years. The Century Boulevard corridor has improved with a 22.2% vacancy rate, but the 5757 building needs upgrades to make it appeal to modern tenants, Solomon said.

The new owner plans to do just that, according to Nagel, Decron’s president, who said the complex has been renamed Airport Spectrum. A $10-million renovation will begin in April. In the meantime, Nagel said, the owners have signed tenants to new and renewal leases on about 80,000 square feet and are negotiating additional deals for about 100,000 square feet.

One of the most unusual stories is that of 1100 Wilshire Blvd., which has remained more or less vacant since it was built in 1986, according to Mike Dunn, a broker with Charles Dunn Co.

The 37-story luxury office tower was built by a successful East Asian businessman, Tsai Ming Yu, but was never more than 10% occupied. The skyscraper was completed as the downtown L.A. office market was hopping, said Dunn, who brokered one of the building’s first leases.

But several factors combined to thwart additional leasing, Dunn said, including some design oddities and the stubbornness of the building’s owner, who seemed to reject nearly every proposed lease .

The building has no underground parking, Dunn said. Instead, the first 15 of the tower’s 37 floors are parking.

“Every floor has a fantastic view because the first offices are on the 16th floor, but the parking arrangement is odd,” Dunn said.

L.A. businesspeople who like to pop in and out of their offices won’t tolerate parking structures of much more than six floors, Dunn said, adding that a trip up or down 15 floors is both dizzying and time-consuming.

Nonetheless, Dunn believes 1100 Wilshire could be leased if management marketed it aggressively.

“It’s not the location,” Dunn said. “It’s a viable market and there are other buildings nearby that have leased up fairly well.”