The downturn in the technology sector hurt Hollywood in the first quarter. But there was some gain with the pain.
“The dot-com implosion isn’t just affecting dot-coms, but ancillary companies, too,” said Bob Safai, founding partner of Madison Partners. “It’s hitting the tech companies as well as production, graphics, venture capitalists everybody. So we’re retrenching to equilibrium.”
According to Grubb & Ellis Co. research, net absorption in the Hollywood office submarket went from 7,107 square feet in the fourth quarter to negative 19,163 in the first meaning tenants vacated that much more space than they moved into during the quarter.
“When you couple the economy with the caution of the entertainment industry relative to their long-term real estate commitments because of the (possible) strike, the result is decreased activity and negative absorption,” noted John Tronson, a principal at Ramsey-Shilling Commercial Real Estate Services.
The downturn in absorption is due primarily to a dozen or so 10,000-to-30,000-square-foot give-backs, he said, with much of that space highly improved. For instance, there’s space available in such properties as 7083 Hollywood Blvd. and 1024 Orange Drive, and the entire 14th floor is vacant at the CNN Building at 7100 Sunset Blvd. Additionally, 6565 and 6464 Sunset are both being rehabilitated, keeping 75,000 square feet vacant.
Hollywood’s relatively high concentration of small parcels is part of the challenge, Safai said. “It’s hard to move absorption when the footprints are small.”
The average monthly asking rent in the submarket moved slightly downward to $2.50 per square foot from $2.55 in the fourth quarter, still significantly higher than the $2.31 of a year ago. The vacancy rate was 12.1 percent in the first quarter, up from 11.4 percent at year-end 2000, and considerably higher than the 9.6 percent posted in the first quarter of 2000.
Due to the softer market conditions, much of the improved space is being offered at below-market rates for the moment, which could lure some cost-conscious lessees to the market.
Asking rents for sublease space is particularly low, Tronson said, because “the people on the hook for the rent are more motivated to fill the space than the patient money (that owns) the building.”
Elle Saling, a research associate at Cushman & Wakefield, said that lower rents can be especially appealing now that energy prices are expected to surge.
“If I could be paying less per square foot and maybe have lower electric bills, I’d at least think about moving,” Saling said, referring to the relatively low power rates of the L.A. Department of Water & Power, which services Hollywood.
Meanwhile, tenants are facing stiff power rate hikes in the local areas served by Southern California Edison, which announced a 42 percent rate increase approved by the California Public Utilities Commission last month.
Major deals in the quarter included entertainment marketing firm Creative Domain’s seven-year lease of 28,440 square feet in the TV Guide Hollywood Center at 6922 Sunset Blvd. for almost $6 million, or $2.50 per square foot. West Grand Media took 14,000 square feet at 6255 Sunset for $2.35 per square foot. Five-Star Video leased 5,500 square feet at 1555 Castille Place for $1.60 a foot, triple net, and Larry Pollack, owner of Miyagi’s and Saddleranch in West Hollywood, leased 7,219 square feet in 8560 Sunset for 10 years at $3.25 per square foot.
As for investment activity, Mission Hills’ Asset Management Consultants Inc. purchased the 75,000-square-foot building at 6725 Sunset Blvd. for $4.6 million from Bar-K Inc. The building is currently undergoing renovations. In West Hollywood, ING Realty Partners and Jupiter Realty sold their 140,000-square-foot 9000 Sunset building to Mani Brothers Real Estate Investment for more than $36 million.
“All things considered, the Hollywood market’s got good things going,” Tronson said. “The big-tenant deals are non-tech or non-Internet-based companies, so we don’t anticipate any more significant space give-backs.”
