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.
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