Funky office space hailed as recently as a year ago as being de rigueur for the truly happening L.A. business has become a white elephant.
Hundreds of thousands of square feet are sitting empty, largely on the Westside, and the flood will get considerably deeper in the months ahead.
Much of that space is being offered up for sublease by the original tenants, which have downsized, departed to cheaper space or disbanded altogether. As an increasing number of these struggling creative types slip into bankruptcy, the financial fallout from their exorbitant, wacky office build-outs is spreading to landlords and lenders.
"A lot of people are trying to whistle a happy tune, but when you get through the initial layer of BS, there is not a single person who is not concerned," said Michael Meyer, a veteran commercial leasing attorney at Pillsbury Winthrop LLP.
Much of the space is not easily converted for conventional office tenants. It is filled with such nonfunctional amenities as enclosed eating areas built right into the middle of where a bullpen area should be, wildly patterned concrete floors, or outrageously designed "hang-out" rooms.
"I refer to this stuff as bowling alleys, waterfalls and AstroTurf the really funky stuff that's fairly new, but worthless," said Anton "Tony" Natis, a commercial leasing attorney with Allen Matkins Leck Gamble & Mallory.
Some of the space is more easily convertible, like the West L.A. offices vacated by eToys Inc. that was largely run like a typical corporation, with an accounting department, executive offices and back-office operations.
"They have some funky stuff in the lobby a giant Lego dinosaur and giant Etch-O-Sketch so it will cost some money to reconfigure, but not a lot more than (a typical office space)," Natsis said.
Actually, many L.A. tenants today while shunning the excessively wild spaces for fear of being perceived as a dot-com spendthrift are not returning to the plain-vanilla corporate spaces of yesteryear.
"Today's type of tenant wants to be edgier than their father's office, but still professional," said Steven Heisler, director of design at Beckson Design Associates in Los Angeles. "Clients want to be seen as being creative, but they try to distance themselves from looking like a dot-com. They want people to know they're still going to be here in five years."
Examples of the new hybrid space can be seen at Arden Realty Inc.'s Westwood Center building at 1100 Glendon Ave. in Westwood and at the Aquent creative talent agency at 6100 Wilshire.
Westwood Center features an open ceiling along the perimeter, but has a drop ceiling over interior workspaces.
"One of the things we look for when we approve (design) plans is that, when a tenant moves out, it'll be attractive to us down the road," said Paul King, Arden's vice president for tenant improvements and construction. "What we don't like is tenants who yank out the ceiling and come in with Star Wars-type lights that don't serve as proper lighting for the entire area."
Natsis gives similar advice to his clients. "I tell them, 'Do not let your tenants do a lot of weird stuff to your buildings because they won't be around years from now to put it back together,'" he said.
Yet installing a few hip touches, like faux brick walls and open ductwork in limited areas, enabled Aquent to create a hybrid space that's more inviting than institutional offices.
"When talent comes in for their appointment, they feel like they're in a creative environment rather than the corporate meat factory," said Marshall Stallings, branch operations manager for the talent agency.
Much of the idled space is still under long-term lease to struggling creative tenants who are trying to find someone to sublease but can't afford to spend any money on rehab work. Instead, these sublessors are resorting to reducing their asking rents and offering an array of incentives from free parking to cash bonuses for any broker who can secure a sublease deal.
"To a certain extent, it's a tenant's market," said Joseph Gabbaian, senior vice president at Grubb & Ellis Co. "It's been a landlord's market since '98, since the start of the dot-com frenzy."
Problem is, most businesses in Los Angeles have avoided entering into any long-term commitments, given the uncertain economic times.
"You've got the perfect market for procrastination," said Ian Strano, senior vice president at First Property Realty Corp. "The decision-maker (looking for office space) can sit behind his desk and read the paper and say, 'Oh, another company went out of business. If I wait a few more months, maybe the market will drop (further and a better deal will present itself).'"
Technology consultant Sapient Corp. has lowered the rent it is seeking to sublease 56,000 square feet of its 85,000 square feet at Water Garden II in Santa Monica. Sapient's broker, Rick Buckley of Insignia/ESG Inc., said the monthly asking rate is now $2.50 a square foot, cut from $3.50 per foot.
A converted warehouse in Marina del Rey that signed tenants at $2.20 per foot in December today is marketing space at $1.50 per foot. A building on Wilshire Boulevard in Santa Monica has a sublessor paying $4 per foot and negotiating with a potential tenant who would pay $2.45 per foot.
Gabbaian said Westside landlords and sublessors used to be able to unload vacant space quickly and in "as-is" condition.
"Now it's not like that anymore," Gabbaian said. "You may be able to get some free rent. You may be able to get some free parking."
Free parking is one concession Neil Resnick has considered offering to facilitate a sublease deal for CarsDirect.com in Culver City. Resnick, a senior vice president at Grubb & Ellis, said he has actively marketed the 24,000 square feet on Jefferson Boulevard for eight months without success. "We've had to adjust our expectations," he said. "I think that's the tamest way to put it."
CarsDirect has dropped its asking rent by 20 percent and is likely to offer free parking, after initially seeking $35 per vehicle.
Another tactic is a bonus to any broker who can deliver an executed sublease. Gabbaian said he gets e-mails every day offering bounties of $1 to $2 per foot to the broker who can close a deal for the space at issue.
Strano said realistic sublessors will fill their space, pointing to L90, an Internet marketing company that recently left 1447 Cloverfield Blvd. in Santa Monica for larger digs in Marina del Rey. The company initially tried to sublease its abandoned space for $3.25 per foot, a premium over the $2.50 on its lease. When it realized the face value of the lease, not the higher asking rent, was the market rate, the company dropped its asking rate to $2.50. No deal is in place yet, though the company said one is in negotiation.
"They all believe their space is potentially valuable, but there's so much on the market, it's not," Strano said.
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