Investment Activity Climbs As Leasing Comes to a Halt
By MARGOT CARMICHAEL LESTER
Leasing activity in Hollywood was virtually nonexistent during the second quarter, but investors unnerved by the equity markets caused a pickup in sales.
Grubb & Ellis Co. data shows that seven buildings changed hands during the April-June period. There was no sales activity in the first quarter.
The dramatic increase, said Bob Safai, managing partner at Madison Partners, was attributable to the low interest rates, stock market debacle and lack of available sound investment vehicles.
“With interest rates this low, real estate is an incredible investment from both the investor and owner/user perspectives,” he said. While not at fire-sale levels, buildings are available at reasonable prices some 10 to 15 percent below what they were last year. “Some prices have adjusted in accordance with the adjustment in rental rates,” he says. “But the lack of available product is buoying prices because demand is much higher than supply.”
Much of the 2.5 million square feet of Class-A space in the submarket is comprised of small parcels, the sort of space favored by start-up companies that flocked to the area during the tech boom. Most of them evaporated in the tech wreck, leaving hard-to-lease properties in their wake.
“Big lease deals in Hollywood are always few and far between because the buildings aren’t really conducive to big tenants,” noted Paul Stockwell, corporate managing director at Julien J. Studley.
The market’s vacancy rate in Hollywood, which includes West Hollywood, inched up to 22.9 percent, from 22 percent in the first quarter and 14 percent in the second quarter of 2001. Taking out West Hollywood’s vacancy rate of 15.6 percent, Hollywood proper jumped to 24.9 percent, second only to the 190th Street Corridor’s 28 percent.
With no office projects under construction, net absorption, the amount of space newly occupied less the amount newly available, managed to gain some ground in the quarter, improving to negative 32,023 square feet from negative 70,651 square feet in the year earlier period. Inconsistent short-term leasing, common in the submarket as TV and movie production houses use the open space for shoots, doesn’t help either.
And while lower rents could mitigate negative absorption, Hollywood’s asking rates are in the same class as those of the ailing but still-desirable West L.A. market.
According to Grubb & Ellis, the average asking rent for Class-A space in Hollywood was $2.40 per square foot in the second quarter, down from $2.49 per square foot in the first and close to the $2.42 per square foot this time last year.
With nearly 250,000 square feet being renovated in the market 93,000 square feet at 6253 Hollywood Blvd. and 75,000 each at 6725 Sunset Blvd. and 6565 Sunset Blvd. and a spate of layoffs in the entertainment industry, the prospect of a quick turnaround is not near.
“I don’t think the corporate players want to make any major moves until the dust settles with these accounting scandals and the stock market is taking a beating,” said Brian Folb, vice president of Paramount Developers & Contractors, which developed 6565 Sunset.
Trizec Properties’ Hollywood & Highland has yet to prove itself the savior, although it might get a boost from proposed smaller mixed-use projects announced by Bond Capital Limited and Legacy Partners.
The very uncertainty in the broader market is driving investors to pay attention to real estate.
“There are a lot of investors looking to buy buildings because they’re getting out of stocks the market is so shaky right now,” Folb says. “Real estate is one of the better alternatives for people who have cash.”
Many of the buildings selling are low occupancy. “This is clearly not a function of investors looking for return based on net operating income,” Folb said. “The play might be to position yourself for when the economy recycles. I don’t think it’s a bad play, if you can hold on for the ride.”
– The Hollywood News Building at 1545 Wilcox Ave. was sold for $6.4 million to Bunge Construction.
– eSuites Inc., purchased the building at 8335 W Sunset Blvd. for $3.3 million from 8335 Property Inc.
– The Ivar Campus, at 1741 Ivar Ave., was sold for $4.3 million to Doublewide by 1741 Ivar/Stephen J. Meringoff.
– The Barham Building at 3301 Barham Blvd. was purchased for $4.3 million by Lotus Communications Corp. from Barham Management.
– Jonathon K. Mills purchased the 23,526 square foot Larrabee Studios East building at 3249-3255 Cahuenga Blvd. West for $2.9 million from the La Kretz Family Foundation