The Westside Los Angeles office market grew nearly twice as much during the last 10 years as was previously thought, and nearly half of its growth was in buildings tailored for entertainment companies, dot-com firms and others seeking a nontraditional working environment.
That’s a key conclusion of a new study, believed to be the first to measure the total amount of “creative” office space built in Santa Monica, Culver City and other Westside markets beginning in the 1990s.
The study by Grubb & Ellis is startling in that it suggests that commercial real estate brokerages that track office space, including Grubb & Ellis, have been under-reporting the size of the Westside office market by millions of square feet for years.
Lenders, developers, landlords, office brokers, real estate investment trusts, institutional investors and tenants look to these reports to make such decisions as whether to lend on construction projects, whether to invest in office buildings and how to calculate rental rates.
One of the most astonishing revelations of the study is that the amount of creative space built on the Westside in the last 10 years nearly equals the amount of traditional office space that was built: 6.2 million square feet versus 6.3 million, respectively. Developers and researchers at other brokerage firms said they were surprised that the Grubb & Ellis report turned up so much of the space but not taken aback that such space has not been counted before because the warehouse conversions are small and numerous, making them extremely difficult to track.
“I knew there was a lot [of creative space], but I’m a little surprised there’s that much of it,” said Cliff Damavandi, managing partner of West Los Angeles-based Inspired Ventures, which is converting two Culver City warehouses into more than 40,000 square feet of creative office space.
For the Grubb & Ellis study, researcher Jeff Nasrallah established specific criteria to define creative space, including building size, ceiling height, the type and number of windows, and other aspects of design and construction. He tracked down 170 buildings that fit the description, visiting each one.
Except for a few new projects built from the ground up, Nasrallah said, creative office space is converted warehouses that were built from the 1920s to the 1950s, many of them featuring brick exteriors and bow truss ceilings. Developers typically sandblast all the building’s masonry, polish the cement floors, add air conditioning and let in as much natural light as possible by adding skylights and windows.
Offices Looking Casual
Creative space, much of it fashioned by Santa Monica developers Steaven Jones and Lawry Meister, have long been popular with entertainment firms, advertising agencies and others who view traditional office layouts as stuffy. As dot-com companies blossomed, they, too, opted for the casual look.
“When these companies are in competition for talented employees, the real estate can often be the draw card they use to differentiate themselves,” said Grubb & Ellis broker Neil Resnick.
The discovery that the creative space segment of the office market is so large carries a number of implications for the Westside office market, which has been the subject of scrutiny lately because failures and consolidations by dot-com companies have emptied more than a million square feet of office space and elbowed vacancy rates up for the first time in years.
Rental rates for creative space are “coming down slightly” already, said broker Tracy Tomson of Beitler Commercial Realty Services, who specializes in creative space.
The landlord of a building Tomson represents on Broadway near 20th Street in Santa Monica has reduced asking rates to $3.15 from $3.25 a square foot per month and is making some financial allowances for tenant improvements, which was not the case previously, she said. Owners of creative space in general are more willing to negotiate with prospective tenants than they were a year ago, Tomson said, because “they don’t have five offers on the table the way they did then.”
More Empty Space Too
The new research also shows more empty office space than previously believed, in part because much of the empty creative space doesn’t appear in most brokerage tallies and in part because the vacancy rate in creative space is higher than it is in traditional office buildings.
About 13.7% of the 6.2 million square feet of creative space is empty or nearly 850,000 square feet, according to Nasrallah’s report. About 8.7% of the 44 million square feet of traditional office space on the Westside is vacant, or about 3.8 million square feet.
When the empty creative space is taken into account, it nudges the overall vacancy rate to 8.9% on the Westside, but brokers say that figure is still healthy.
“Everyone talks about all of the space that’s been dumped on the Westside market, but any time you’re under double digits, it’s a respectable number,” Grubb & Ellis broker Resnick said.
Vacancy is higher in creative space than in traditional office buildings because the former is bearing the brunt of the dot-com shakeout, said Joseph Gabbaian, a Grubb & Ellis broker who collaborated with Nasrallah on the study. Empty creative space includes hundreds of thousands of square feet now offered for sublease by dot-com firms that abandoned it.
However, Gabbaian said he and some others believe the creative space will begin to fill again if the entertainment industry can escape serious harm from possible strikes by the Screen Actors Guild and the Writers Guild of America.
“Entertainment companies are sitting on the sidelines, waiting to see what happens with the two [possible] strikes,” Gabbaian said. “Once those strikes get resolved, a lot of us expect to see a surge in occupancy.”
Only certain types of companies are candidates to fill the creative space, according to Gabbaian, who said the open office designs of such buildings “just don’t work” for companies that like traditional layouts with lots of private offices and cubicles. Also, converting the creative digs to traditional offices would be expensive, about $30 to $35 per square foot in construction costs.
Developer Damavandi, who expects to complete the conversion of his Culver City warehouses this summer, said the Grubb & Ellis study validated something he has long suspected: “Creative office space is a new direction that’s here to stay because of the entertainment industry and all of the creative people in this city.”
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The “creative” office market, virtually nonexistent 10 years ago, has grown to more than a third the size of the traditional office market in Santa Monica, Marina del Rey-Culver City and West Los Angeles.
Creative office market
* Market: Santa Monica
Number of buildings: 55
Total square feet: 2 million
Vacancy rate: 18.7%
* Market: Marina del Rey-Culver City
Number of buildings: 78
Total square feet: 2.6 million
Vacancy rate: 14.1%
* Market: West Los Angeles
Number of buildings: 37
Total square feet: 1.3 million
Vacancy rate: 8.1%
Total buildings: 170
Total square feet: 5.9 million
Overall vacancy rate: 13.7%
Traditional office market
* Market: Santa Monica Number of buildings: 79 Total square feet: 7.4 million Vacancy rate: 8%
* Market: Marina del Rey-Culver City
Number of buildings: 69 Total square feet: 4.7 million Vacancy rate: 6.5%
* Market: West Los Angeles Number of buildings: 58 Total square feet: 5.3 million Vacancy rate: 8.3%
Total buildings: 206
Total square feet: 17.4 million
Overall vacancy rate: 7.6%
Source: Grubb & Ellis Co. Note: Figures are for Santa Monica, Marina del Rey-Culver City and West L.A. only. Total of all Westside office markets is 44 million square feet with an 8.7% vacancy rate.