A year after making one of the largest office leasing deals in more than a decade, Fox Interactive Media is abandoning plans to move into nearly a half-million square feet of office space in Playa Vista.
The company is committed to a 12-year, approximately $350-million lease. But now it faces financial difficulties and plans to lay off some of the people who were slated to move into two new office buildings in the splashy development near Marina del Rey.
The layoffs are part of a restructuring of Rupert Murdoch’s News Corp.'s digital operations and come only two months after former AOL executive Jonathan Miller was named chief digital officer, with oversight of the media giant’s online properties. It was not known how many employees would be let go, but people familiar with the situation said the number of pink slips would be significant.
“Like any company with new leadership, Fox Interactive Media is reviewing every aspect of our operations, performance and structure,” the company said. “It’s no secret that we are looking for ways to improve our products, increase the value of our digital assets, and enhance the overall financial strength of the company.”
Fox rented the buildings to bring together more than 2,000 employees who worked throughout the region. The company was to start moving in this month but is now seeking to sublet the space instead. The Fox real estate department has circulated marketing materials offering two floors of one building for rent.
Lincoln Property Co., which owns the buildings, confirmed Friday that Fox would not occupy the 420,000 square feet in the Horizon at Playa Vista that it had sought when the buildings were under construction.
The interactive division of News Corp., like other media companies, has experienced a steep drop in online advertising, and its social network MySpace has lost popularity.
Revenue was down 11% for the quarter that ended March 31, year over year. Fox also owns IGN Entertainment and the movie and product review site Rotten Tomatoes.
MySpace’s troubles have been widely publicized, culminating in the departure this spring of co-founder and Chief Executive Chris DeWolfe.
The once-dominant social network has been surpassed by rival Facebook in terms of number of users worldwide. And the micro-blogging application Twitter is generating more buzz in tech circles.
One industry analyst said all social networks, including MySpace, were struggling to figure out how to make money. Spending on Internet advertising for the first quarter of the year is down 5% compared with a year ago, according to the Interactive Advertising Bureau and PricewaterhouseCoopers.
“The online networking space overall hasn’t turned out to be as lucrative as people originally thought. That’s one of the biggest problems,” said Charlene Li, founder of Altimeter Group, a research firm specializing in social networks.
Meanwhile, office landlords were already seeing rising vacancies and falling rents. The recession has caused some tenants to cut back on the amount of office space they rent and others to flee the Westside, which is still the most expensive office market in the region.
“We are disappointed to hear the news that Fox is not moving to Playa Vista,” said David Binswanger, an executive vice president of Dallas-based Lincoln Property. “The good news from our perspective is that we have a long-term lease and patient lenders who are optimistic about the area long-term.”
Fox will save millions of dollars if it can sublet its Playa Vista offices, said real estate broker Neil Resnick of Grubb & Ellis. “The sooner they dispose of the real estate, the better off they are financially.”
Unfortunately for Fox, rents have been falling and vacancy has been rising on the Westside for the last 12 months, Resnick said. By dumping its offices back onto the market, Fox would increase the amount of office space available for sublease on the Westside by 16%, to 2.5 million square feet.
The entire Playa Vista development is only a few years old, which may help Fox find a subtenant, Resnick said. “It’s a bit of an anomaly in the market,” he said. “It has cachet.”
Playa Vista, the former home of business buccaneer Howard Hughes’ aviation empire, has 7,000 residents and will be valued at $6 billion when complete, Playa Vista President Steve Soboroff said. The project’s next phase is slated to begin construction in 2010.
“Fox’s decision is a sign of the times,” Soboroff said. “American companies are making drastic decisions at lightning speed.”