Properties with high walk scores had lower risk of default
A study by Gary Pivo of the University of Arizona determined that properties with high walk scores had a much lower risk of default than properties with low walk scores. In other words, properties near retail and transits were safer bets for lenders and by inference for investors (or more conservative investors buy properties with low walk scores?).
Tower Burbank at 3900 Alameda Burbank Sells To Jeff Worthe
When we started in the mid-90’s converting buildings to creative office and getting top rents–everyone said it was a fad. During the dot com boom–we thought they were right. Many spaces were converted back to creative office.
Today, the Los Angeles Times reports that Jeff Worthe is going to convert a paradigm class A highrise tower in Burbank to creative office. The article states: “Another move will be to tear out the carpeted floors and dropped ceilings that were standard trappings of corporate office buildings in the 1980s but are now considered fusty to firms in creative fields such as entertainment…Offices will have polished concrete floors and exposed-concrete ceilings.”
This trend is causing a grounding shifting change in relative values. In 2005, BlackRock paid $160 million (or $333 per square foot) for this 480,000 square foot Burbank office tower leased to Disney. Jeff Worthe just paid $109 million or $227 per square foot for this class A highrise in the middle of the media capital. In contrast, someone just paid $305 per square foot for an empty raw industry building (with one per 1000 parking) next to our property in Culver City’s Hayden Tract. Long live brick and timber and bow truss ceilings.
The article is below.
Tower Burbank purchase boosts landlord’s dominance in media district – latimes.com.
We created a tech friendly office building at 10951 Pico Boulevard. We put in higher ceilings, concrete floors, wood floors, exposed elements, and the foosball table. However, the tech companies need to scale upward from 4 people per 1000 square feet to 10 people per 1000 square feet. So we had to get creative with just less than 3 per 1000 parking.
Step 1 was a re-striping of our parking lot from less than 3 per 1000 to more than 3 spaces per 1000 square feet.
Step 2 was cutting a deal with the nearby Westside Pavilion Shopping Center to rent additional spaces for our tenants allowing us to offer more than 10 spaces per 1000 square feet parking.
Westside Pavilion Parking is a 2 Minute Walk
Step 3 was to publicize the availability of free street parking 4 minutes away along the new Expo Line.
Free street parking is 4 minutes away
Step 4 and 5 was courtesy of CalTrans who just built a new first come first serve 250 space parking structure eleven walking minutes away and will open the Expo Line Station in 2015 so people do not even have to drive.
free 250 car parking structure and new Sepulveda Expo Station, an 11 minute walk
Risk On
With the economy improving, we have entered a new phase of the cycle. The risk on part. Investors have stopped fearing fear and have moved on. Are we in the greed stage? The problem is that real estate investors cannot find yield or attractive opportunities in safer or more stabilized investments and are now pursuing riskier investments–new construction, value add, tertiary markets. Investors are moving off of the sidelines and on to the playing field. Once we talked about underwater mortgages, then Greece, and now we talk about yield.
This trailer provides a great analogy of what the beginning weeks of a Recession are like for a developer. You are surrounded by very dense fog and have zero visibility. You are just back to back with your associates waiting. You can hear the grunts and groans of the zombies. You do not know how many or where they will come from. Suddenly, they are all around you and you must fight them off to survive. Sneak peak Walking Dead Episode 413:
100 Years of Mortgage Rates
Interest rates still stand at some of the lowest levels in one hundred years. As fear resides, greed surfaces. Investors are in a desperate search for yield. The article below explains that the market for office buildings is being powered primarily by low interest rates, which have made it cheap to borrow money and have made the income buildings generate from rent seem relatively appealing. “The world is starved for yield,” says Scott Rechler, chief executive of New York landlord RXR Realty LLC, one of New York City’s most-active recent buyers.
Interest rates drive cap rates as investors attempt to create positive yields between the property’s return and mortgage rates or returns on more passive investments. The chart below shows the relationship between cap rates, interest rates, and the spread between the two. Only during the whacky 80’s did spreads turn negative. In those times, all cash buyers dominated the market place and super high rent increases (or projected rent increases) were used to make those negative spreads disappear.
Cap Rates, Mortgage Rates, and Spreads
Cap rates are at the lowest point since 1951 except for their most recent lows during the peak years 2007/2008. Mortgage rates, on the other hand, are also at some of their historical lows despite their 100 basis point rise from the low of last year.
The question arises on whether cap rates and interest rates are both sustainable. Bill Gross argues that governments must maintain rates and will only very gradually raise them over a long period of time because economies are addicted to low rates. Any sudden rise would have a very harmful impact on the economy.
We must be aware that the cap rates and interest rates today are far from the norm.
The City of Santa Monica is now codifying into zoning their Bergamont Area Plan. As part of that new zoning, the City will be tasked with defining what constitutes “creative office” as opposed to “business or professional office”. The zoning will determine who can and cannot locate in a building that is “creative offices.” Some firms may find it unnerving that they are not considered “creative.” The purpose of the zoning is described as maintaining the clustering of firms involved in creative endeavors. We have an office property that will be impacted by this new zoning. As a result, we offered our own definition to the City.
Allowed Uses: Creative Offices shall include offices for any and all firms involved in the Creative Industries of art, architecture, advertising, design, fashion, research, entertainment, media, technology including but not limited to:
| Advertising and Marketing Firms | ||
| All uses customary and incidential to the production or distribution of print, video, audio, digital and software. | ||
| Architectural and Engineering Firms | ||
| Art spaces | ||
| Audio Video, or Print Recording, Editing, and Distribution | ||
| Costume, set and Prop Production and storage involved in audio video production | ||
| Company offices for firms involved in the creation, production, sale, and distribution of goods and services | ||
| Conversion of Services, Text, Business Practices to Digital Media | ||
| Designers | ||
| Fashion and clothing design, marketing, sale, and distribution | ||
| Film and Media Distribution and Placement | ||
| Film Developing and Printing | ||
| Film, TV, Audio, Print Commercial and Studio Production and Post Production | ||
| Fitness and Health products and services | ||
| Graphic, Fashion, Product, Industrial and Interior Design | ||
| Inventors | ||
| Investment Banking Servicing Primarily the Creative Industries | ||
| Media Broadcasting and telecommunications facility | ||
| Multimedia equipment repair and service | ||
| Photography | ||
| Printing and Media reproduction services | ||
| Product Testing | ||
| Production, design, development , consultation, distribution, sale, and service of software, digital, and marketing media and information technology for placement on computers, the internet, wireless devices, and other media | ||
| Publishing | ||
| Research and Development | ||
| Retailing and wholesaling through the internet and other media | ||
| Sales and wholesaling of media related goods and equipment | ||
| Software and digital companies | ||
| Talent Agencies | ||
| Think Tanks | ||
| Venture Capital Firms | ||
| Video and Audio Libraries | ||
| Video game design, production, sale, and distribution | ||
| Web design and services | ||
The Googleplex in Silicon Valley
The Creative office park is the scaling of creative offices into a campus setting to emulate the campus experience achieved by cutting edge silicon valley technology companies like Google or Facebook.
Creative office started in Los Angeles as the conversion of industrial buildings into office space while maintaining the industrial architectural features of the original space. These features included the high exposed original ceilings (usually sandblasted), brick or concrete walls, and polished cement floors. Posts, beams, steel, pipe were left all exposed. The space was first used by artist and art galleries, architects and designers, then entertainment companies, then advertising firms, and finally technology companies. The term morphed to include exposing the structural elements of any building by removing drywall and exposing the structural ceilings.
For a while, innovation in this area came from entertainment firms concerned with the architectural aesthetics of the space and how it would represent their artistic image. Now innovation is coming from the technology area to allow higher densities and cool workplaces for their younger more tech savvy employees. At first, artists defined the category followed by the artists in the entertainment industry. Now, technology firms are defining the category, not only as a style but as a way of working in a more collaborative, dense, and amenity rich environment.
Creative office parks are grouping of creative office buildings that offer google-like outdoor collaboration space and amenities for the workers who work in the park. These amenities may include gyms, volleyball courts, dog runs, vegetable gardens, bicycle storage and repair, cafes, and social areas that might be found on the roof of a W hotel.
Social Area at Olympic Media Campus, West Los Angeles
Amphitheater and patio area at Google Venice
Outdoor social area at Playa Jefferson, Playa Vista
Outdoor seating at Playa Jefferson Campus, Playa Vista
More outdoor seating at Playa Jefferson Campus, Playa Vista
Beach Volleyball Court at Lantana, Santa Monica
Outdoor collaboration seating at the Reserve, Playa Vista
It takes some creative thinking to find parking for office tenants in Los Angeles. Despite the hope that office workers will take transit, most still drive. Los Angeles office workers demand and covet convenient parking. Many tenants today are looking to accommodate worker densities of four to five people per 1000 square feet. However, most buildings have parking of 3 per 1000 square feet or less.
The Over Park: Many buildings with unreserved parking can offer parking at 3.6 per 1000 square feet even if the actual parking lot has only 3 spaces per 1000 square feet. This anomoly results from what is called an “over park.” Even in the most peak parking situation, only 80% of the people with parking spaces will use the parking at the same time. The others are out of the office. This allows the office building owner to sell more spaces that he actually has. The key is to have unreserved versus reserved parking ..We have found it very difficult to shift tenants from reserve to unreserved parking even if you can offer them more parking passes as a result.
Valet: In many cases, a valet can increase the number of parking spaces that can be sold. To break even, a valet must create an additional 35 to 45 spaces per valet. In a recent case, we saw two valets park 40 additional cars on a 60 car lot.
Automated Parking: Several owners are turning to automated parking, although this is still rare and expensive. It will probably require a valet to operate and require very stringent screening regulations.
Hustle and Search for Offsite Parking: The next technique is to hustle to find and lease offsite parking for tenants. Finding offsite parking is becoming harder and harder. However, as parking rates rise, more people will lease out under utilized day time parking spaces. In the case of our 10951 Pico office building, we approached the nearby mall for years to rent parking spaces on their lowest level. We observed that nobody but mall employees parked on the lowest level during the weekday. On entreaties fell on deaf ears for years. Then the mall instituted an automated parking system which allowed them to identify what spaces were being used when and to better control who parked in their parking. Based on this technology, the mall finally offered to lease our tenants offsite spaces. Now we can offer almost unlimited parking to our tenants.
The problem in Los Angeles is that parking is a loss leader. Tenants want not only convenient parking but they want subsidized parking. Monthly parking rates would need to range from $200 to $300 per month to justify building parking garages. In Los Angeles, parking rates range from $75 to $150 per month.
Owners must continue to find new offsite spaces. What about apartment buildings whose tenants are away at work during the day.? Could this parking be used by office tenants during the day, and can residential tenants use office parking spaces at night? Owners need to apply creativity and persistence to identify parking for their tenants.
Rendering of Tishman’s Creative Offices to be Built in Playa Vista
Compare to the Exterior of Penn Station, a warehouse PMI converted in Santa Monica
Creative office was once considered a fad or niche business. Now it is mainstream. Creative office in Los Angeles was once the purview of small developers. Now it is in the cross hairs of every major office investor and developer in Los Angeles: Kilroy, Hudson, Lincoln, Legacy, Tishman,
One advantage of converting a warehouse was that you could not replicate the aesthetics very easily into a newly constructed office building. So in some sense, the renovated warehouse had superior bones than a newly built multistory office building.
Many of these developers are now creating creative office parks fraught with common area amenities from parks, dog walks, volley ball courts, fire pits, etc. In the tradition of new office construction, these builders are use to focusing on creating a great common area experience while the aesthetics of the suite is just an empty shell, distinguished only by its window line and views and left to the discretion of the tenant.
In the original creative office, we focused more on creating a great authentic industrial experience within the suite. Tishman now is going to try to create that same authentic experience of a converted warehouse in a newly constructed creative office building in Playa Vista. Tishman boasts that the new buidings will have the same features as aconverted warehouses with ceiling as high as 24 feet (and maybe bow-trusses). See the article below.
Developer to build five office buildings in Playa Vista – latimes.com.
PMI Properties 