As office rents continue to rise on the Westside, more developers are pulling the trigger on large speculative office buildings.
By the end of the year, more than 650,000 square feet of speculative office properties are expected to be under various stages of construction across the Westside submarket.
And more could be on the way.
"This has been a refreshing change," said Bill Boyd, executive vice president and managing director of Grubb & Ellis Co.'s downtown L.A. office. "Five years ago we didn't know if we'd ever see spec development again."
Established office developers such as Maguire Properties Inc. and IDS Real Estate Group plan to break ground on large speculative projects within the next several months. And Trizec Properties Inc. is considering building "on spec" at the Howard Hughes Center once its transaction with Arden Realty Inc. is completed later this year.
While the amount of the construction is still a blip compared to the Westside's 51.5 million square feet of office space, the uptick in "spec" activity is evidence of a shift in the market and in developers' confidence.
Building on spec or starting construction before the developer has leases in hand for at least 25 percent of the space can be risky. During the early-1990s recession, a number of speculative office buildings sat empty, as the city lost some corporate headquarters and the market was flooded with empty office space.
Since then, L.A. has seen little speculative construction because the market hasn't been strong enough to support monthly office rents of about $3 a foot, the point when a project makes financial sense. However, rents in Westside now often top $3 a foot.
Developers also point to the Westside's declining vacancy rate currently below 10 percent and lack of new construction as reasons for a newfound confidence in speculative projects. Projects also take from 16 to 24 months to complete, which can provide speculative developers plenty of time to find tenants.
"That gives us a lot of marketing time," said Anthony J. Manos, senior vice president of Trizec's Southern California region. "It also makes it easier because once you start construction, you drastically change tenant perspectives on a project they can touch it, feel it and know it's happening."
'Timing is right'
For now, spec development has been focused primarily on the Westside, where market conditions have been more favorable than other parts of L.A. County.
The Westside submarket has had the greatest amount of office space taken off the market in the last two years. In 2004, more than 1.3 million square feet was absorbed, and last year nearly 2.8 million square feet was newly occupied.
Those absorption levels have led every submarket in L.A. County. In 2004, the Westside accounted for nearly half the amount of space cumulatively taken off the entire L.A. County market. In 2005, when leasing activity began to gain momentum market-wide, the Westside accounted for more than 25 percent of total absorption.
"The timing is right," said David Mgrublian, a principal in IDS Real Estate, which expects to break ground on a Culver City office building this year. "There are good market demographics for a spec building."
Meanwhile, there has been scant Westside space built recently. Outside of Trammell Crow Co.'s 790,000-square-foot 2000 Avenue of the Stars project in Century City, most new Westside office buildings have been small 100,000 square feet or less.
Beyond the parcels already entitled for office development, few opportunities exist for future projects and developable tracts are increasingly being snatched up by well-funded residential builders.
JMB Corp., the Chicago developer responsible for a number of Century City high-rises, is planning on using two of its last parcels in Century City to build twin, 50-story condo towers instead of office buildings.
"There's an incredible supply constraint," Trizec's Manos said. "Any sites that are available or that become available are going to be critically looked at for residential first."
Residential developers, who can afford to pay higher prices for land due to the region's sizzling housing market, are also taking older office buildings off the market for conversion to housing. Century City mall owner Westfield America Inc. announced earlier this month that the company wants to raze two office buildings that cumulatively contain about 300,000 square feet to make way for shops, restaurants and condos.
Neighborhood groups have also made it difficult for office developers because the groups would rather have land developed for housing since residential projects typically create less of a traffic impact on the community.
That preference has made getting entitlements for office buildings very difficult. For that reason, the speculative projects about to break ground took several years to get approvals.
Maguire Properties whose founder helped build a number of downtown's skyscrapers plans to break ground on the first phase of a 195,000-square-foot project at the Lantana Entertainment Media Campus in Santa Monica.
Outside of the Lantana expansion, there are few other office projects of that size in the surrounding Santa Monica market, where asking rents are over $3.50 a foot and vacancy rates have fallen below 7 percent.
"We believe in the strength of the market and we believe there are not a lot of entitled sites available," said Maguire spokeswoman Peggy Moretti. "And given the interest we've received this far without launching a marketing campaign, we are confident in the strength of the market to move forward without a commitment."
During a February 8 conference call with investors, Rob Maguire, chief executive of Maguire Properties, said that the company expects to break ground on a 65,000-square-foot building at Lantana in May and a second 130,000-square-foot building in September. Both buildings, he said, would take between 10 to 12 months to complete and would be available in early 2007.
Meanwhile, IDS Real Estate is purchasing land in Culver City's Corporate Pointe office park that has entitlements to build a 250,000-square-foot office building. IDS plans to start construction by mid-year.
IDS' Mgrublian said the firm believes a spec building will work in Corporate Pointe because of all the development occurring around the area. Symantec Corp. is building a 500,000-square-foot headquarters for its Norton Antivirus subsidiary and Westfield America is undertaking a $100 million remodel of its nearby Fox Hills Mall.
"It's a market with a high level of demand, that is highly accessible and has good visibility," Mgrublian said. "It has all the aspects that we look for with spec projects."
Across the San Diego (405) Freeway from Corporate Pointe, Howard Hughes Center has perhaps some of the largest entitled parcels for office space on the Westside.
The Howard Hughes Center has approvals for 490,000 square feet of offices and 600 residential units. Trizec is buying the complex in a $1.8 billion portfolio from Arden Realty.
Before selling its portfolio late last year, Arden had planned to build a 200,000-square-foot spec building at the site. Even though the transaction hasn't closed, Trizec executives have said they could easily move forward with the project.
"Developers in Los Angeles have done very well on a spec basis under conditions not as good as today," Bill Tresham, Trizec's executive vice president and chief operating officer, said last month. "So I think building an office building at Howard Hughes on a spec basis wouldn't be a hard decision to come to."
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