Several months ago El Segundo was reaping the benefits of a tight Westside office market, with developers barnstorming the South Bay city because it was a proximate if downscale representation of bustling Santa Monica.
The land rush is about to take its toll.
With office leasing slowing to a trickle, vacancies on the Westside rising and rent rates falling, nearly 1 million square feet of space equal to 12 percent of the market is set to come on line by the end of the year.
The bulk of that space comes in the form of unleased speculative buildings in a market already treading water.
El Segundo is looking at $180 million worth of empty office buildings, and it’s anyone’s guess who will fill the space.
Developers, not surprisingly, believe things will turn by the time their projects open, but they will face a market with a vacancy rate close to 15 percent and 350,000 square feet of sublease space already vying for tenants.
Leading the pack of developers heavily invested in El Segundo are:
– Continental Development Corp. The company is developing a 290,000-square-foot, $70 million office building at 2301 and 2321 Rosecrans Ave. coming on line in mid-November, and a 25,000 square foot, $4.5 million project going up at Rosecrans Avenue and Aviation Boulevard, set to open in mid-October.
– Opus West Corp., which has a 121,000-square-foot, $25 million office building financed by Guaranty Federal Bank F.S.B set to be completed at the end of August at 2151 Grand Ave.
– Overton Moore & Associates, which is putting up a $40 million, 216,000-square-foot building at Douglas Street and Mariposa Avenue, financed by Fremont Investment & Loan. The company has another $40 million project, the 170,000-square-foot Cross Pointe, going up at South La Cienega Boulevard and Pacific Concourse Drive and financed by Haverford Capital and Corus Bank.
“I guess the problem with this market is who’s going to fill this space,” said Jim Jandro, senior managing broker at Insignia/ESG Inc. “We’re not seeing the diverse corporate America we were five years ago.”
Risk of foreclosure?
If anyone should be worried, it’s the lenders.
With tens of millions of dollars out in short-term construction loans, they are waiting for creditworthy tenants to sign on, enabling developers to lock in longer-term, lower interest mortgages on their buildings. Absent tenants, developers won’t be able to take out their construction lenders. That might put these lenders in the position of taking on unwanted property management roles.
Still, Michael Stein, executive vice president of commercial real estate lending at Corus Bank in Chicago, said he’s not fretting about the money he gave Overton Moore for Cross Pointe.
Developers, he said, have much more at stake than the banks and aren’t likely to let a bank foreclose.
“We tend to do business with a developer who can keep the lender current until the building is full,” Stein said. “We pick developers with the character and ability to pay the interest out of pocket if need be.”
For their part, developers of the vacant El Segundo projects are banking on a turnaround in the economy in the next six months.
“I think we’re going to be coming out at a good time,” said Continental’s president, Richard Lundquist. “The economy will be stronger at the beginning of next year.”
Continental already has 2.5 million square feet of office space in its 20-building Continental Park in El Segundo, and is bringing more than 300,000 square feet on line by the end of the year at a cost of nearly $75 million.
Since the buildings are just now getting their skins, Lundquist said they’ve hit the stage of construction where they can be shown to prospective tenants. Not only is he confident he’ll find those tenants, he expects to do so at rents of $3.15 per foot, which is above the current $2.75 to $3 per foot market rate.
Tighter standards
Opus West’s 121,000-square-foot building, opening late next month, will come in at $2.75 per foot per month the bottom of the market rent range for Class A product, according to Gary Toeller, vice president of real estate development for the Phoenix-based developer.
What developers have learned from the past 12 months is that if a dot-com did manage to come knocking, they would be held to a much higher standard than a year ago.
Toeller said landlords are steering clear of the tech companies that built up the Westside market and, subsequently, boosted El Segundo’s profile. Jandro said the new buildings need established tenants to build confidence in the market.
“If those guys can get their arms around a good corporate tenant with credit, they’ll set a precedent that they can get deals done,” Jandro said.
Lundquist said that might be true if the buildings were opening tomorrow.
“I definitely think six months from now is preferable to opening a building in July,” he said.
“One thing to recognize is when you look at the five buildings being done now, all are different types,” said Bill Bloodgood, first vice president at CB Richard Ellis Inc. “So I don’t think they’re going to be beating each other up.”
While Bloodgood said pre-leasing speculative buildings would be the exception rather than the rule, he conceded that 1 million square feet will have an impact on the office market and likely keep rents stable.
