Tenant Issues Clouding Future of Constellation Project

Real Estate
by Danny King

How long the stars will remain aligned for Century City's Constellation Place remains to be seen.

While it's business as usual at the 700,000-square-foot office project, which is scheduled for completion mid-2003, questions surround the stability of its two anchor tenants Metro-Goldwyn-Mayer Inc. and International Lease Financing Corp.

MGM, which is taking 350,000 square feet in a deal in excess of $250 million, is being shopped by Kirk Kerkorian. Meanwhile, commercial airline leasing company ILFC's decision to double its space by taking 125,000 square feet at Constellation Place came about a year before its industry was rocked by the Sept. 11 attacks.

While local sources believe that ILFC, whose parent company is insurance giant AIG, will occupy most of its new space, there's a chance that a portion of MGM's space will be up for sublease, depending on whether the film and television studio is sold and to who.

"If Fox buys it, maybe there's a bunch of redundancy there," said Hunt Barnett, senior managing director at Insignia/ESG Inc. "If Bertelsmann buys it, there's no redundancy."

Gary Weiss, former managing director for the recently shuttered real estate arm of Credit Suisse First Boston, noted that if a portion of the MGM space is put up for sublease, it could hurt further leasing efforts by developer JMB Realty Corp.

None of these issues were a concern when the project broke ground in the third quarter of 2000. ILFC and MGM had just signed deals about a dollar above Century City's $3.30 asking rents at the time, with MGM having the option to take an additional 75,000 square feet. MGM already has said it would not exercise that option, and Century City's vacancy rate has nearly doubled, with 375,000 square feet being put back on the market since JMB broke ground.

Despite the current downturn in all businesses related to the commercial airline industry, John McRoskey, senior vice president at CB Richard Ellis, said that ILFC's space demands are unaffected.

"It hasn't lessened any of their requirements so far," said McRoskey, who repped ILFC on its deal at Constellation Place.

Westside Expansion

Alschuler Grossman Stein & Kahan LLP is taking advantage of a rare opportunity to expand and consolidate at the same time.

The 85-person law firm will be moving its offices from Century Plaza's south tower to more space on fewer floors at Santa Monica's Water Garden, having signed a sublease deal with Turner Broadcasting.

While terms were not disclosed, total consideration for the 10-year deal for the 85,000 square-foot space, formerly occupied by law firm Haight Brown & Bonesteel LLP, was about $30 million, according to local sources.

"We've run out of space," said firm Principal Stanton "Larry" Stein, who said the firm would take three full floors at Water Garden. After the former Alschuler Grossman & Pynes merged with Stein & Kahn in 1999, the firm, which had been occupying the 39th and 40th floors at 2049 Century Park East, expanded to parts of the 38th and 28th floors.

"All of our common services can be in one area," said Stein. "When you're using different elevator banks, that creates problems."

The firm also faced the possibility of getting bumped from its Century City offices, as HBO, among other firms, had first rights to the space when the law firm's lease runs out.

Turner signed an 11-year lease with Water Garden landlord JP Morgan last August, but never occupied the space.

"We wanted to be in something that was less of a high rise situation," said Stein. "It's a very pleasant environment out there."

Insignia/ESG Inc.'s Barnett and Clay Hammerstein and Bailes and Associates' Joel Kurtz represented the tenant, while Cindy White and Robert Chavez of Staubach Co. represented the landlord.

Staying Put

One firm that did decide to stay in Century City, albeit temporarily, was Korn/Ferry International.

The executive search firm signed an extension on its lease for 51,000 square feet at 1800 Century Park East. Total consideration for the three-year deal, with an option to opt out after two, was $5.8 million.

Korn/Ferry was expected to be a part of last year's migration of firms from Century City to downtown and was rumored to be looking at space in the Gas Co. Tower. But with the decision to remain in Century City, the company is now part of another trend that of companies holding off on major operational decisions until the economy regains its footing.

"The short-term economic gains for the firm were compelling enough to stay," said Korn/Ferry spokesman Daniel Margolis, who added that the flexibility of having a short-term deal "leaves us the best of both worlds."

Though short-term deals could come at the expense of longer-term savings downtown rents are about a dollar a foot less than Century City's it's a trade-off that a growing number of firms are willing to make, according to Insignia/ESG's Barnett.

"Their stock had taken such a beating (down about 50 percent from a year ago), and they didn't want to lay out any capital to move," said Barnett.

Stan Gerlach and Kevin O'Connor of CB Richard Ellis represented the landlord, California State Teachers Retirement System, while Staubach's Chavez, Christina Bellinghausen and David Kutzer represented Korn/Ferry.

Long Time Coming

And you thought your property was hard to lease

A 5.2 acre parcel in El Segundo that sat vacant for 20 years finally found a tenant after 11 years on the market. The property, near the intersection of Rosecrans Avenue and Aviation Boulevard, was leased by California Storagemasters in an 11-year deal worth $1.5 million.

The site, once home to a smelting company, has no street frontage and had contamination issues. But the landowners, Chicago-based H. Kramer Co., capped part of the property with concrete and asphalt, on which the tenant will be storing its recreational vehicles and boats.

"There have been at least two business cycles since this property has been put on market," said tenant rep Jim Sullivan, broker with Klabin Co.

Jim Biondi of Grubb & Ellis Co. represented the landlord in the deal.

Staff reporter Danny King can be reached at (323) 549-5225 ext. 230 or at dking@labusinessjournal.com.

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