El Segundo has it all: smoke stacks, LAX air traffic, a slice of the most congested freeway in the nation. Oh, and there’s the beach, but you have to traverse a water treatment facility to get there.

But now that list of dubious desirables has been joined by another distinction: a really hot real estate market.

The 5.5-square-mile city of 17,000, which used to be a hub of businesses in the aerospace and defense industries, is being transformed as large older buildings are converted to new uses and millions of square feet of new projects are coming out of the ground.

The change is being driven by property owners and investors who see an opportunity to ride a wave of demand from creative and other businesses for modern, low-rise office buildings.

“For a long time, people’s perception of El Segundo was that it was this back-office community for cheaper rents,” said Jacob Bobek, a principal at real estate brokerage Avison Young. “But the office space there has shifted away from that to opportunities for good work environments in creative office space.”

Landlords and developers in El Segundo have together committed more than $1 billion to update and build out the city’s office market. At least 20 development projects – about half ground-up construction and half major renovations to existing buildings – are in various stages of planning or construction in the area. New construction alone promises to add more than 2.8 million square feet of office space, 133,000 square feet of retail space, 927 hotel rooms and a 115,000-square-foot sports facility. Those additions come on top of renovations to nearly 4.8 million square feet of former aerospace and defense industry buildings that are on the drawing board or have been recently completed.

This bullishness, said developers and brokers working the market, is in large part due to the a solid transportation infrastructure, proximity to executive housing in nearby beach cities, high-performing public schools, a low cost of doing business and the speed with which the small municipality can grant approvals.

Suzanne Fuentes, mayor of El Segundo, said that in the small, business-friendly city, building permits and licenses cost less and take considerably less time to obtain than in bigger, more bureaucratic cities.

“The one big incentive we have is we’re a small town,” she said. “We’re very agile and responsive, and people have generally been very supportive of development in El Segundo.”

Larry Field, chairman of NSB Associates Inc. of Beverly Hills, developer of a 12-acre Utah Avenue campus, said he likes building in El Segundo, where the development process takes less than half the time of other cities.

“The process in El Segundo goes very quickly,” he said. “It’s been a pleasure to work in a place where you can really mean it when you say you’ll get started and be finished in 12 months.”

And because of the way it’s zoned, El Segundo has never really had to contend with community opposition to development as in other beach communities. The city’s office core, about 2.5 miles square, is situated almost entirely east of Sepulveda Boulevard, effectively insulating the city’s residential core to the west.

Creative commons

Not to be discounted in the attention El Segundo has received lately is the steady march south of Silicon Beach businesses squeezed out as rents rose first in Santa Monica, then Venice and, more recently, Playa Vista.

One team taking advantage of that has been Invesco Real Estate of Newport Beach and Second Street Ventures of Burbank, which partnered to buy four buildings at Continental Park, a massive project developed by Continental Development Corp. in the 1970s and ’80s. Invesco and Second Street paid $57.4 million last year for the properties totaling about 541,000 square feet. The partnership is spending $130 million on what it is calling Apollo at Rosecrans, converting the buildings to creative office space. This spring they signed deals with online fashion subscription company JustFab Inc. for more than 97,000 square feet and digital marketing firm Rocket Fuel Inc. for about 30,000 square feet.

“They’re getting the highest rents in the market – basically $3 a square foot a month – because it really has a cool feel” said Steve Solomon, a managing director for Jones Lang LaSalle Inc. who handles leasing for several landlords in the El Segundo market, though not for the Apollo at Rosecrans project.

At $3 a square foot a month, rents for low-rise Class B creative office space in El Segundo are surpassing more traditional mid- and high-rise product in the market. In the third quarter of this year, average Class A asking rents in El Segundo were only $2.67 a square foot a month, according to data from JLL. Still, the more expensive Class B office rates in El Segundo continue to be a significant discount to more popular beachside markets to the north. In Santa Monica, average Class A rents were $4.49 a square foot a month in the third quarter.

Alex J. Rose, senior vice president of development at Continental Development, El Segundo’s biggest office landlord with more than 3 million square feet, conceded that companies squeezed out of Silicon Beach would have to be willing to brave physical barriers to entry in exchange for more affordable office space, unless a majority of their employees already live in the South Bay.

“To the north you’ve got this impenetrable barrier, which is LAX, and it’s a tough slog to get down the 405 (freeway),” he said. “I think if someone’s choosing to be in El Segundo, it’s because they want to both live and work in the South Bay area.”

Increased inventory

Adding 2.8 million square feet and renovating nearly 5 million square feet would be significant in any office market, but in El Segundo, where Class A and B office inventory together totals about 9.8 million square feet, nearly the entire market is being reshaped. Nearly half of all office properties are being reconfigured and new projects could grow inventory by more than 28 percent.

While developers and brokers working in El Segundo agree that construction activity is long overdue for a market that was essentially bypassed in the development cycle before the Great Recession, the city’s office vacancy rate is already at 17.5 percent, more than the countywide average of 16.6 percent. Could so much new inventory really be a good idea?

“If you look at vacancy rates on a macro level, you get very concerned. There are huge pockets of vacancy in some of these larger former aerospace buildings,” Rose said. “But smaller buildings are nearly 100 percent full. We’ve got people who have signed leases for spaces they can’t get at for 18 months.”

One reason Rose might be optimistic is that his latest project, being built in partnership with Mar Ventures Inc. of Torrance, is a for-sale development of smaller buildings being pitched to owner-users.

The team purchased land at the southwest corner of Douglas Street and Maple Avenue from Thomas Properties Group Inc. last year, part of a larger project called Campus El Segundo that spanned 46.5 acres. The original project was entitled about a decade ago for more than 2 million square feet.

Continental and Mar Ventures have begun spec construction on what they have dubbed Elevon. That mixed-use development consists of 210,000 square feet of office space in 17 buildings of various shapes and sizes as well as 13,500 square feet of retail space. The office buildings, designed by Steven Ehrlich Architects of Culver City, will be marketed for sale rather than lease. The campus is expected to be completed next year.

Despite the city’s high vacancy rates, Rose said he’s confident the company will sell the buildings without trouble.

“Having watched the transformation of Playa Vista and seen what’s happening on the Westside and certainly in Hollywood and downtown, there’s very little question in our mind that similar opportunities exist in this market,” he said. “Will they come with the speed and jaw-dropping prices as in other markets? Probably not, but this has been a steady-Eddie market for decades.”

Four of the 17 buildings planned for the Elevon campus are in escrow with undisclosed buyer-users.

The partners also have a deal to sell a 5-acre development site south of the campus to the Los Angeles Lakers. The sale is expected to close by the end of the year, when developers should begin building a 115,000-square-foot, state-of-the-art training and administrative office facility for the team.

Continental and Mar Vista also have a deal to sell a nearby 2.6-acre site to Taiwan airline EVA Airways Corp., which has commissioned a 250,000-square-foot West Coast regional headquarters building.

‘Playing catch up’

Whatever impact new construction could have on El Segundo, renovations to existing buildings could be even more significant.

Bill Bloodgood, a senior vice president for CBRE Group Inc., said huge vacancies in big, outdated aerospace buildings have hurt the market the most.

“El Segundo is a market that’s been playing catch up with the downsizing of the aerospace and defense industries for years now,” he said. “As recently as 2008, 25 percent of leased space in El Segundo was occupied by three primary aerospace companies: Boeing, Raytheon and Northrop Grumman. Today, only 8 percent is occupied by those users.”

To successfully renovate those buildings and attract more diverse tenants would be a boon to the market and a stabilizing force, so landlords throughout the city are doing just that.

Pacific Corporate Towers, for example, an office park comprising three office towers totaling more than 2 million square feet at 100, 200 and 222 N. Sepulveda, recently completed a $10 million renovation to its exterior, common areas and some interior office suites. Each tower had been occupied by a single tenant when they were built in the early 1980s: Rockwell International, Hughes Aircraft Co., and the U.S. General Services Administration. Today, with more than 80 tenants, the buildings are about 80 percent occupied.

Renovations to smaller former aerospace buildings with low-rise profiles and excess surrounding land have perhaps more potential to make a difference in the market. That’s because once they’ve been reimagined, those buildings are likely to be a bigger draw to younger businesses with a creative bent – or at least those businesses with an appreciation for something more interesting than their father’s office.

Among the landlords pushing for a “cool” feel in former aerospace buildings in the area and thus, higher rents, are Bixby Land Co. of Irvine and Montana Avenue Capital Partners of West Los Angeles.

Bixby recently spent about $25 million to redevelop a 114,000-square-foot building at 2101 El Segundo Blvd. The renovation includes contemporary necessities such as a bar area and outdoor space with a fire pit and a dog run. Meanwhile, Montana Avenue is gearing up to renovate a 53,000-square-foot building a block away at 2201 El Segundo. That venture, called the Station, is expected to cost $17 million.

Yet another renovation project in pursuit of profit is taking place on a 6-acre campus that was formerly fully occupied by visual effects company Rhythm & Hues Studios. New York real estate investment company Rockwood Capital and Marshall Property & Development of Newport Beach are rethinking indoor and outdoor common areas, adding a parking structure and upgrading basic building systems. The $20 million project is expected to be completed by the end of the year.

Paul Marshall, president of Marshall Property, said that now, because of projects like his, tenants who want to be near the beach don’t have to sacrifice quality of space for affordable rents.

“With our efforts and others’, there’s been an influx of ground-up or repurposed properties,” he said. “Now for the first time in quite a while, the market has good product to marry up with the great location.”

Area amenities

Until the early 1990s, when aerospace and defense companies first began to shrink in earnest, retail and restaurant establishments outside the city’s quaint downtown drag west of Sepulveda were nearly nonexistent. Workers in the city’s many high-security aerospace complexes rarely left work for lunch or to run errands. In fact, to keep employees from needing to check out of secure buildings, Aerospace Corp. asked the city for permission to build a pedestrian bridge over El Segundo Boulevard to connect the company’s employees to the Los Angeles Air Force Base.

Lack of foot traffic did little to encourage a vibrant street life.

But as smaller, more diverse businesses have begun to move into the area, retail, restaurant, hospitality and even education developments have picked up steam.

At the corner of Sepulveda and Rosecrans Avenue, Federal Realty Investment Trust of Rockville, Md., is building a 115,000-square-foot retail center called the Point. The $80 million project is adjacent to Plaza El Segundo, a 381,000-square-foot retail center the company bought in 2011.

Complementing the retail, El Segundo is expecting four hotels to open in coming years. Planned projects include a 170-room Hampton Inn, a 154-room Cambria Hotel, a 247-room Aloft Hotel and a 356-room Fairfield Inn & Suites. The latter two will be built on the site of what is now the 619-room Hacienda Hotel at 525 N. Sepulveda.

Finally, in an unorthodox conversion of office space, a former aerospace building at 201 N. Douglas St. will become a high school. The Wiseburn School District, which serves El Segundo and neighboring Hawthorne, is spending about $100 million to build a 205,000-square-foot school designed by downtown L.A. design firm Gensler.

“What we’re seeing is a lot of lost time is being made up in a short period,” said Richard Higgins, a managing director at Charles Dunn Co. “You have this pent-up demand, and now you suddenly have a flood into the marketplace.”

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