Offices go up in earnest as long space glut ends

Times Staff Writer

The early 1990s were dark days for commercial real estate developers in Southern California. “Stay alive until ‘95,” they used to say.

But only now is a strong recovery at hand. Landlords are cranking up rents, and office developers are beginning to build again in earnest. More than a dozen major office towers and complexes in the region are being built or are to start construction shortly.

For the record:

12:00 a.m. April 6, 2007 For The Record
Los Angeles Times Friday April 06, 2007 Home Edition Main News Part A Page 2 National Desk 1 inches; 48 words Type of Material: Correction
Office market rebound: An article in Business on Thursday about the resurgent Los Angeles office market said developer Molasky Pacific planned to build 700 condominiums at Columbia Square on Sunset Boulevard in Hollywood. Plans call for 400 units. The article also misspelled the developer’s name as Malasky Pacific.

To old-timers, however, the burst of construction activity in recent months raises the nagging question of whether the office market will once again overheat and tumble.


“Will it be a repeat of 1990 to ‘92? Absolutely not,” said John Cushman, chairman of giant real estate brokerage Cushman & Wakefield. Is the Southern California “market ready for new construction in selected areas? Yes.”

The 1980s and early 1990s were heady times. A construction boom of historic proportions dramatically changed the Southland’s urban landscape from Irvine to Woodland Hills. The most dramatic example of that construction is the 72-story Library Tower, which opened in downtown Los Angeles and is now called US Bank Tower. It remains the tallest building in the West.

But the market went bust -- fast. A downtown office-space glut peaked in 1992 with a vacancy rate of 29.3%. Vacancies stayed above 20% through the rest of the 1990s and beyond, driving down rents, putting several landlords in bankruptcy and pushing a lot of professionals out of the business.

Young graduates of top local universities who once clamored to become real estate brokers turned their attention to other fields. As the Internet era unfolded, a popular theory held for a time that office buildings would become obsolete as workers did their jobs online.

A mock industry prayer implored, “Dear Lord, if you give me just one more good market, I promise not to [throw] it all away next time.”

Next time may be now. It looks like the people who make a living in real estate are finally getting a do-over. And industry observers say that, so far, the market is looking good.


Last month alone, a splashy ground breaking was held for the Red Building at the Pacific Design Center in West Hollywood. CarrAmerica Realty announced it would build in Howard Hughes Center in Westchester, and Higgins Development Partners promised to get started this year on a $130-million office building in Burbank.

Also getting underway are two office buildings at Playa Vista that would be the first of several, and three developers are putting up four buildings in Irvine. Two more are under construction in Santa Monica.

Things have changed since the last boom. “Green” environmentally friendly buildings are popping up, savings and loans are no longer pumping dollars into dubious projects, neighborhood groups have more power than ever to thwart development, and traffic congestion is a growing challenge.

Gone too are the high vacancy rates of the 1990s. In the last quarter of 2006, rates were below 5% in hot Southern California business districts and about 10% overall for Los Angeles and Orange counties. Even office space in downtown L.A. got a little tighter with a 16.3% vacancy rate.

There is a genuine demand for new buildings, said Bobby Turner, managing partner of Canyon Capital Realty Advisors. His Beverly Hills company funds development and also puts up buildings on its own.

In many U.S. cities there is a pent-up desire among tenants for good-quality office space in the parts of town where businesses want to put down roots, he said. “Just because you build it doesn’t mean they will come. It has to be well-located.”


Good locations for development have obvious qualities such as being in desirable neighborhoods and having access to freeways and public transit. It’s also important that nearby buildings are nearly full.

Office vacancy rates can vary widely among the far-flung business nodes of Los Angeles and Orange counties. And with low vacancy rates typically come higher rents.

Developers generally consider a market ready for new buildings when its vacancy rate falls below 10%. And rents are finally going up enough to justify some new construction, industry observers say.

“In the 25 years I have been in this business, this is the first time it has truly been a landlord’s market, where landlords have pricing power,” said real estate broker Chris Houge of Madison Partners, who represents the developer of a planned office project near Marina del Rey.

Also preparing to wager on rising rents is developer Mark Cassidy of Malasky Pacific, a Las Vegas-based builder. He is seeking approvals on an $850-million development in Hollywood on the Sunset Boulevard site of the former CBS studios at Columbia Square with partner Apollo Real Estate Advisors.

The developers plan a 14-story office tower next to the historic studio site, which is to be restored and get an addition.


“We’re taking a gamble that rents will go up” within the three years it will probably take to complete the project. It is also expected to include about 700 condominiums, a hotel and a garage.

Cassidy’s development is one of the new breed of buildings to be built and operated under strict environmental standards. Last time around, green building specifications didn’t even exist.

Developers such as Lincoln Property Co. and Tishman Speyer plan to seek certification from the United States Green Building Council for their multiple buildings at Playa Vista.

“Tenants are asking for it and it makes economic sense because costs of doing it have come down and it lowers your operating costs” when the buildings are complete because they are more energy efficient, Cassidy said.

As the newest round of office construction gets underway, broker Cushman said, the risk of overbuilding again is small because the industry is more cautious.

Erecting offices, however, is inherently risky because it can take several years from the moment a building is proposed to the day it is fully occupied.


Much can go wrong in the meantime, he said. “Office development is a tough, tough business.”