Special Report: Real Estate Quarterly

Special Report: Real Estate Quarterly Photo by Ringo Chiu.

On any given weekday afternoon, a blocks-long row of food trucks lines Wilshire Boulevard across from the Los Angeles County Museum of Art. But it’s not the sparse noontime crowd of museumgoers they are there to serve.

Rather, it’s mostly hungry young office workers from nearby buildings – including one massive tower that just a few years ago was completely empty – that they are targeting.

Recently, media companies such the Oprah Winfrey Network and music publisher Bug Music Inc. have moved onto this historic stretch of Wilshire called the Miracle Mile – a district that was for years an afterthought for companies seeking office space.

While no divine intervention is likely involved, it’s remarkable that the neighborhood has engineered a comeback amid the worst commercial real estate downturn in decades.

“It’s gone from being the market that people went to just looking for a cheap deal, their second-choice market,” said Lisa St. John, principal at brokerage L.A. Realty Partners, “now, all of a sudden people are saying I want to be in this market.”

So what’s behind the turnaround of the district of more than 1 million square feet that for years was what brokers call a “spillover” market for companies that couldn’t afford Beverly Hills or Hollywood, despite such cultural amenities as the art museum?

Historically defined as the one-mile stretch between Fairfax Avenue and La Brea Boulevard – but today considered to stretch several blocks further in each direction – the market is loaded with high-quality older office buildings, the kind that today’s infill developers love. With real estate relatively cheap, what hasn’t been fit for renovation has been torn down for new development.

What’s more, with the growth of Hollywood, the district finds itself a central location between that neighborhood, downtown and Westside, a consideration in traffic-clogged Los Angeles. It also doesn’t hurt that LACMA has been expanding its campus with new exhibition halls.

Now, entertainment and creative firms have been snatching up space in the district, employing a pool of young residents who have moved into a growing numbers of apartments.

All of this has helped strengthen the office market, which has been one of the few local submarkets to absorb space steadily over the last two years. In the fourth quarter, the Miracle Mile boasted the county’s fifth lowest vacancy rate, which at 13.1 percent is below even adjacent Beverly Hills.

Still, for all its strength, the area’s comeback is far from complete. Fourth quarter asking rental rates at $2.51 a square foot are well below anything on the Westside, downtown or Hollywood, and even as many shops and eateries have opened up, vacant and shabby storefronts still mar the area.

“I would love to see some dynamic retailers come into the area. They just don’t realize the potential we have with the daytime and nighttime population,” said Wayne Ratkovich, whose Ratkovich Co. completed redeveloping the district’s tallest office tower three years ago. “We think that the Miracle Mile is a bit of a secret in L.A.”

Second choice

The Miracle Mile was developed in the 1920s by downtown real estate agent A.W. Ross, who envisioned the strip as a retail paradise for the automobile, with storefronts easily viewable through a windshield. By 1940, Ross had brought in more than 100 retailers including department stores such as May Co. and Coulter’s. The success led to the district’s moniker.

But the rise of the suburban indoor mall in the late 1960s drew away shoppers. Some buildings were transformed into offices, while others were torn down or left vacant. Still, the neighborhood never fell into total disrepair, given the proximity of residential neighborhoods, including the massive Park La Brea apartment complex. What’s more, museums began popping up, eventually garnering part of the strip the name Museum Row. Most notably, LACMA opened in the mid-1960s.

Meanwhile, some developers continued to build in the 1970s. But it wasn’t until the late 1980s, when developers such as Jerry Snyder entered the market, that it further evolved. Snyder bought up several properties including the 5757 Wilshire building, now known as Museum Square, as well as the 5700 block across the street. There, he razed the property and built the 1 million-square-foot Wilshire Courtyard, one of the area’s premier office buildings (and where the Business Journal has its offices).

That and other offices created the market’s status as a second choice destination. It was filled mainly with professional service firms, banks and publishing companies.

Finally, during last decade’s commercial real estate boom, developers and investors took another look at the neighborhood. Many project’s started late in the cycle, but with financing secured they were completed in the last year or two.

Take 5900 Wilshire, a 30-story, 491,000-square-foot tower directly across the street from LACMA. It had sat neglected and completely vacant for years before Ratkovich Co. bought it for $105 million in 2005.

“It had a terrible reputation, but we looked at the bones and the location across from LACMA and thought it’s got to be the best around,” said Clare De Briere, executive vice president at Ratkovich. “We bought the building under the assumption that everything would have to be new, and we were 100 percent right.”

The company spent about $34 million renovating the building from top to bottom, including replacing all the walls, floors and 16 elevators. But it paid off in 2008. Ratkovich lured Variety from Wilshire Courtyard and made the entertainment industry trade publication its anchor tenant, with a 55,000-square-foot lease and building-top signage. Since then, other entertainment and creative companies have moved in, includng Sundance Institute, a non-profit that promotes independent film that came from Beverly Hills.

What’s more, Wilshire Courtyard owner RREEF Real Estate, an affiliate of Deutsche Bank Group, closed a high-profile deal in 2009 with the Oprah Winfrey Network to open its L.A. headquarters in space Variety vacated.

Broker St. John, who has worked in this market for years, said she’s seen this up and down Wilshire.

“Prior to two years ago, people really wanted to be in Beverly Hills,” she said. “All of a sudden it’s become, as an entertainment company, ‘I don’t need a Beverly Hills address or I don’t want a Beverly Hills. That’s old school. I want something hipper and this area is cool and more Hollywood.’”

As a broker, St. John can be forgiven for a bit of boosterism, but her comments are grounded in reality.

The office tower she represents west of Fairfax Avenue at 6100 Wilshire, a 17-story office building owned by Kennedy Wilson Holdings Inc., was mostly filled five years ago with professional service firms that spilled over from Beverly Hills. Today, more than half the building is occupied by entertainment and creative firms such as Bug Music, a music publishing company for popular artists such as Bruno Mars and Wilco.

Bug Music moved into the building last summer from its longtime Hollywood home on Sunset Boulevard. Sheela Abdi, director of human resources and facility management, said the company wanted to be closer to other creative companies, take advantage of cheaper rates and have creative office space. Bug Music’s suite on the 16th and 17th floors is decorated with bold reds, has five balconies, and ceiling speakers that pump out music.

“First and foremost, (we like it because of) the space,” she said. “(And) it’s nice to be walking distance to the L.A. Tar Pits and have lunch in the picnic area. That’s great for our employees and not something we could do for them on Sunset.”

Apartment living

That’s not all that’s driving the development. There also has been an influx of young residents, from techies to professionals to creative types.

Since 2005, developers have added more than 500 residential units in half a dozen or so buildings, including mixed-use projects at 5353 Wilshire and 667 Detroit St. built in 2005 by Chandler Partners. Two years later, Avalonbay Communities Inc. opened a mixed-use property at 5115 Wilshire.

More recently, BRE Properties Inc. of San Francisco and Legacy Partners Inc. of Foster City developed multifamily complexes with groundfloor retail spanning an entire block.

BRE built first, in 2008, adding 284 apartment units and several thousand square feet of retail on the 5600 block of Wilshire. Not long after, Legacy added 163 units at 5550 Wilshire. Both complexes replaced decrepit commercial buildings and are nearly full. That has helped to turn what used to be a lunch-only location into one that now sees residents dining out, enjoying nightlife and hanging out on weekends.

“Call it synergy that just feeds on itself and builds on itself,” said Steve Kramer, president of the Miracle Mile Chamber of Commerce. “You drive through on Sunday now and people are walking on the streets to La Brea.”

In fact, BRE found such success with its first complex that it has broke ground on a larger one only blocks away at Wilshire and La Brea. That project, slated to open in 2014, will bring 478 units to the area.

Eddie Garcia, a 33-year-old neighborhood resident, feels there certainly is demand.

“I used to live close to downtown, but rent was comparable in Miracle Mile for more space, and there’s more culture and life in the Miracle Mile,” he said. “There are a lot of young professionals and a lot of like-minded people. And we basically live in burger heaven right now.”

Indeed, the combination of all of this has made the area incredibly attractive for other retailers. It’s telling that Umami Burger, an upscale burger joint that has developed a cult following, opened its first location three years ago on La Brea Avenue, just a few blocks south of Wilshire. Now, getting in on the action are the Counter, a Culver City-based custom-burger chain that opened in the heart of the Miracle Mile in late 2010, while popular Washington, D.C., burger restaurant Five Guys Burger & Fries is opening this year.

“A lot of retailers that don’t have a presence there now, they are putting this submarket as their top market in terms of finding space,” said broker Steve Ravan, a South Park Group Inc. senior vice president who handles retail.

Depressed rents

LACMA also is helping to bring more people into the neighborhood by expanding its campus over the last few years. The institution opened the Broad Contemporary Art Museum, added a permanent lamplight installation to a renovated entryway and, most recently, opened the Resnick Exhibition Pavilion.

The museum has seen its attendance jump to more than 1 million annually from 600,000 only five years ago. Businesses have noticed, too. Ratkovich Co. said that its newest tenant, Hall Family Law, chose the 5900 building in part because of its proximity to LACMA.

What’s more, the Academy of Motion Picture Arts and Sciences has announced it would like to open a museum of movie history at Wilshire and Fairfax Avenue in the former May Co. department store that LACMA acquired years ago. The academy had originally planned to build it in Hollywood. The two parties are negotiating terms of the deal, which is dependent on AMPAS coming up with the money to develop the museum by the fall.

But there are still plenty of challenges ahead for the market.

Ironically, what’s helped the Miracle Mile attract tenants have been asking rents that undercut nearby markets.While Beverly Hills was asking $3.65 and Hollywood $2.84, Miracle Mile landlords were asking a monthly rate of $2.51 a square foot last quarter, according to Jones Lang LaSalle Inc.

But such rents could stymie the sort of building improvements and office construction that would further develop the market. Currently, the only new construction has been residential and retail, while “new” office space has been emerged from renovated buildings.

“I wouldn’t say that’s a strong market,” said Charles Dunn Co. broker Chris Runyen.

And retail still remains sparse compared with nearby neighborhoods. “We are just at the very tip of the iceberg when it comes to retail coming back to the street,” said chamber President Kramer. “We aren’t going to get department stores back –that’s not realistic – but it’d be great to have more retail.”

For example, an upscale Marie Callender’s Grill opened on the strip in about 1980, but otherwise there are few white tablecloth restaurants. Ratkovich has been trying for years to get approval to bring one in his building. And the owners of a renovated former department store building, at 5410 Wilshire, have been searching, too, unsuccessfully.

So what could be done to give push the neighborhood’s development along? There’s a proposal to add a neighborhood trolley that would connect the popular Grove retail centerto the Miracle Mile. But what would likely have more impact is building a proposed Purple Line subway stop at Fairfax Avenue.

Until then, as companies continue to look for high-quality affordable space in a central location, Ratkovich’s De Briere expects more tenants will move in.

“We are in the beginning of our heyday,” she said, optimistically.

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