Rents and Land Values Go Up as Vacancy Rates Go Down

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Commercial-to-residential conversions and mixed-use projects have eaten into available office space in Hollywood in the second quarter, pushing rents and land values up and vacancy rates down.


The development pace has concerned preservationists, who could put further pressure on a constricting market.


The area’s vacancy rate was down to 7.6 percent in the second quarter from 11.3 percent in the first quarter. Asking rates for Class A rentals climbed to $2.99 a square foot. That’s up from $2.89 in the first quarter and $2.46 in the second quarter of last year.


Technicolor, a division of Paris-based

Thomson

, signed a lease to occupy an entire six-story office building on the Sunset-Gower Studios, a facility that will house the company’s post-production facilities. Construction should begin next month.


“It’s created some buzz for the area, with a concentration of a major operation at Sunset-Gower,” said Kerry Morrison, executive director of the Hollywood Entertainment District’s Business Improvement District.


The bulk of new projects in Hollywood, however, are residential mixed use. More than 4,000 residential units are set to come online, most of them along the Vine Street corridor. The area has seen more than $1 billion in proposed development, but just 115,000 square feet of office space is presently under construction, according to figures from

Grubb & Ellis Co

.


Some of Hollywood’s most storied entertainment landmarks have changed hands recently, leading preservation groups to worry that the appetite for new development will steamroll the community’s iconic cultural history.


“There is a lot going on in Hollywood, which is in keeping with the recent trend, but you are starting to see backlash from the preservation groups,” said Janet Neman, senior managing director of

Charles Dunn Co

.’s West Los Angeles Investment Services Group. “The more mixed-use and condo conversions that are coming up, there will be much more of a battle in the Hollywood area to keep the integrity of these historic jewels.”


At least four landmark sites along the Sunset Boulevard corridor are slated for redevelopment, something that has raised alarms in conservation circles.


“There are a lot of historic entertainment uses in Hollywood and we want to ensure that the pace of residential conversion doesn’t them drive out,” said Los Angeles Conservancy preservation advocate Jay Platt. “There are a slew of conversions in the works and people are still looking for more space, there’s still a lot of demand. It has to be addressed, and done soon.”


The pace of residential-heavy development is such that members of the Hollywood Chamber of Commerce and groups including Hollywood Heritage have undertaken preservation efforts of their own. They’ve begun lobbying to protect Hollywood’s remaining office buildings.



Combined Properties Inc

. is buying the landmark Palladium on Sunset Boulevard to develop residential units, stores and a hotel on the site. The deal is valued at $65 million.


Developers familiar with the Sunset Boulevard site have said that the 66-year-old hall’s nearly 4-acre property has more value as a location for housing, shops and restaurants than as a concert hall, and to make a project work on the site the venue might have to be razed. But Community Redevelopment Agency of Los Angeles officials and preservation advocates have said they would like to see the Palladium remain intact. The Old Spaghetti Factory restaurant and the site of the Nickelodeon Theater are also slated for residential development.


Though residential and mixed-use projects are most prevalent, some Hollywood sites are being developed to ease the office space crunch.


Developer

DS Ventures LLC

is planning to convert the commercial building adjacent to the Metropolitan Hotel on Sunset Boulevard into 40,000 square feet of office space.


Most involved say that the preservation of some historic cultural elements is necessary. The question is, how much?


“I think reasonable preservation is critical and important to the long term value of Hollywood as a destination for the entertainment industry, regional business and tourism,” said Christopher Bonbright, chief executive of Ramsey-Shilling Commercial Real Estate Services. “But it has to be functional preservation, allowing us to keep what represents Hollywood history a fa & #231;ade or courtyard that is historical but not things like paint colors and low ceilings. These buildings have to work for today’s users, so it’s a common sense operation.”


The scramble for office space will almost certainly drive rental rates higher soon.

“We are about at that tipping point,” Bonbright said. “Rents will absolutely be significantly higher in 12 months than they are today not just 5 percent or 10 percent more, but a lot higher.”

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