One of PMI’s partners, Jeffrey Palmer, was featured in the latest edition of the Los Angeles Business Journal. Click the link below to read the article in its entirety.
In 2003, after the dot-com bust, PMI sensed an amazing purchasing opportunity in San Francisco. The area south of Market, known as SoMa, had vacancies reaching upwards of 40%, leasing brokers began describing the area as “toxic.” SoMa looked like a promising area to recreate the magic acquisitions PMI assumed in the Los Angeles Westside during the mid-90s property grab.
By 2003, entertainment, advertising, and media companies on the Westside of Los Angeles had helped the area stage a rapid comeback from the tech crash. Late in 2003, PMI sold a 75,000 square foot Santa Monica creative office property to a Texas-based realty pension adviser. It was the first time an institutional buyer purchased a Westside creative office building. Soon after, the buying frenzy started and creative offices were being bought and sold at record prices. Comparatively, in SoMa during 2003 and 2004, only residential converters were buying creative office buildings and for under $125 per square foot.
PMI targeted San Francisco as a prime place to purchase creative office buildings for several reasons:
- The city has an incredibly large workforce of highly educated individuals.
- The city has one of the greatest concentrations of software engineers in the world.
- Two of the top universities in the country are located in the area.
- The city is dominant in venture capitalism.
- We took into account Richard Florida’s “Creative Class,” in which he argues that the world’s power and wealth will be concentrated in super regions of knowledge workers. We agreed with his theory and believed San Francisco fit the paradigm perfectly.
- We considered the study of the history of innovation, which shows that the discovery of disruptive technology tends to end in a bursting of bubbles and is followed by an even greater and more mature expansion of the technology (a cycle that can happen many times).
While San Francisco seemed a great arbitrage, we were too frightened to buy anything in 2003. It wasn’t until late 2005 that we bought our first property, with the tenants and cash flow in place at the time. The deals were not as good as buying empty buildings, but they were a lot better than the creative office deals on the Los Angeles Westside. Rents climbed from $22 modified gross per square foot in 2005 to $36 modified gross per square foot in 2007and then collapsed below $22 modified gross per square foot in 2009.
With rents at an all time low and a building half vacant, we went on a search for the best start-up companies we could find and made them deals they could not refuse. Our first two takers were Eventbrite and Yammer. In another building, we leased a space to a startup called Twitter.
As described in this article from the San Francisco Business Times, things got much better in San Francisco. Rents are now well over $40 modified gross per square foot. The arbitrage between San Francisco and the Los Angeles Westside is no more. REITs and institutional investors dominate the business now.
“My warning,” says Jeffrey Palmer of PMI Properties, “is that this is a very volatile business. At some point in the cycle–both on the rise and fall, what you are experiencing may be volatility.”
PMI has edgy creative buildings with a lot of startups as tenants. These startups are attracted to PMI’s creative spaces in smaller buildings. We emphasize great architecture and build communities for the tenants to interact with each other. Many of our tenants over the years have been acquired as a method of their exit: Applied Semantics, AZ Razorfish, Guardian Edge, Apture, Playdom, Techcrunch, and Doubleclick to name a few.
Once these firms are acquired, the corporations want the firm to integrate into the ‘mothership’. They will either wait for the new acquisition’s lease to expire, try to sublease the space, or offer a buyout option. These large corporations have facility managers who also demand a different set of services. They want a state of the art security service and will sacrifice the edgy aesthetics to achieve it. Sometimes the acquired company fights for their independence within the corporate structure. These companies want to keep an identity and culture separate from the acquirer. Zappos is a classic case of such a company. They stayed true to their culture when they were acquired by Amazon. In fact, Amazon actually strongly encouraged Zappos to stay true to their roots– it was part of what made them so unique and special in today’s Internet marketplace.
Another example is that in PMI’s buildings, Techcrunch renewed their lease versus moving into an AOL facility. Keeping their old digs was one way for Techcrunch to retain their independence from AOL and maintain a separate culture at the same time.
Overall, corporations keep their goal of wanting to move the new startup acquisition to a space that falls more in line with the main, home office of the corporation. This occurs at the same time as having the startup stay true to their founding identity and what made them so attractive to acquire in the first place. A balance between the two needs to be maintained and sometimes it is a fine line to reach.
A recent article published from Bloomberg.org discusses the rise of creative space throughout major cities. The resurgence of the digital technology sector has created a demand for this type of creative office space. This time around, major developers and institutional investors acknowledge this trend and have driven down the yields on this product. Certain features of the space are leading to new ways of working, especially for firms with employees who spend a lot of time on computers or mobile devices. This is a shift from a traditional office environment where employees focus their time in small conference rooms or on the telephone. At PMI, we continue to strive for our spaces to promote creativity, collaboration, and the ability to scale if needed.
In all of about 15 years in Los Angeles, there were only about three or four developers doing this. PMI was one of them. None of them were institutions. It was hard to get financing as the lenders believed this type of office design was a fad. PMI was able to buy Marina Studios because the lender who foreclosed could not figure out what exactly Marina was or how it should be used. It did not work as an industrial building and it did not look like offices. PMI was able to take control of the building, effectively design and market it, and we now currently maintain a fully leased building.
The full article outlines more of the characteristics of these new, emerging offices.