Developers Nail Down Construction Projects

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West L.A. real estate investment trust Kilroy Realty Corp. plans to break ground this year on more than 350,000 square feet of office space at Columbia Square in Hollywood, the first substantial ground-up office development in the neighborhood in 25 years.

It’s one of a handful of new speculative office projects, totaling more than 1.5 million square feet, expected to be completed in Los Angeles County in the next four years. As office building values and rental rates increase and vacancies plummet in some of the county’s strongest markets, some developers are beginning to build from scratch after years on the sidelines.

“The timing is right (to build) now, given where the economy is,” said David Simon, executive vice president of Kilroy. “We have been trending in the right direction for a long time. Where sales prices have gone with existing buildings, by the time you rehab and get them to where they need to be, you’ve spent what it could be to build a new product.”

Kilroy’s 700,000-square-foot mixed-use Hollywood project, on a five-acre site that once housed CBS studios, includes the rehab of the studio space to suit office and retail use, two ground-up low-rise office buildings and 200 residences in a high-rise tower. It should be completed by the end of 2015.

Other developers are working on projects in Hollywood and other hot markets such as L.A.’s downtown and the Westside. Hollywood’s CIM Group LP is under way on construction of a 95,000-square-foot office project called Formosa South at the Lot in Hollywood. Meanwhile, Miracle Mile developer J.H. Snyder Co. has announced two new office projects: a 250,000-square-foot office campus in Hollywood and a 250,000-square-foot tower on the Miracle Mile.

But the largest office development in Los Angeles is downtown: Korean Air, a unit of South Korean transportation giant Hanjin Group, is constructing 400,000 square feet of office space as part of a $2 billion mixed-use hotel-retail-office building known as the Wilshire Grand, which is set to open in 2017.

The developer sees promise in the expanding L.A. economy.

“We see the office market is having an uptick in new and different types of businesses locating in L.A., whether that’s high tech or financial services,” said Sean Rossall, a spokesman for the project. “That is promising for a development like ours. Coupling that with the rise in travel and tourism demand makes our destination a premiere space for a company looking to work internationally.”

Brian Halpern, executive vice president of CBRE’s debt and equity finance division in Century City, said capital markets are starting to warm to financing spec construction.

“Bank financing was probably not there 12 to 18 months ago, but there is now interest,” said Halpern. “Full spec (office development) may be difficult, but it’s just the fact that they are willing to consider it when it was off the radar only a year ago.”

Indeed, speculative construction doesn’t come without risks. Cohen Bros. Realty Corp.’s 400,000-square-foot Red Building, a Class A office tower at the West Hollywood Pacific Design Center, has remained vacant since opening last year.

Other developers have fared better. Jeff Worthe and a partner just completed the conversion of a Postal Service distribution center into 368,000 square feet of creative office in Playa Vista. The project is about half leased now to creative and entertainment firms such as celebrity gossip outlet TMZ.com and software maker Microsoft Inc.

Kilroy is already negotiating deals with tenants for its project and Simon is confident it will be attractive to Hollywood’s growth industries.

“This project is cutting-edge for where creative tenants want to be,” Simon said.

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