The Arboretum office complex in Santa Monica was popping with news last week with Lowe Enterprises selling its Sony Music headquarters campus and then announcing it will build a new speculative office building elsewhere on the site.
The two deals stand out as the biggest in a bunch of deals that demonstrate the strength of Santa Monica’s commercial real estate market.
El Segundo-based Kilroy Realty Corp. bought the 94,844-square-foot, three-building Sony Music campus for $31.2 million, according to Tyler H. Rose, senior vice president and treasurer at Kilroy.
The seller was a partnership of Brentwood-based Lowe and Boston-based AEW Partners L.P., according to Rick Newman, a Lowe Enterprises vice president who was part of the negotiating team.
Lowe was the original developer of the Arboretum, which is part of a popular Santa Monica office district that includes the adjacent Water Garden project, MGM Plaza and MTV’s headquarters.
At the same time, Lowe last week announced it will break ground in September on a 130,000-square-foot, two-building project called the Arboretum Courtyard.
The building is expected to be the second speculative office building to get under way this year following a five-year drought. PacTen Partners plans to break ground Aug. 7 on a 24-story, 500,000 square foot project at 655 N. Central Ave. in Glendale.
Lowe is acting as developer and leasing agent and Menlo Park-based Spieker Properties is the owner. The project is to be built next to the Sony Music campus.
Newman said the sale of the Sony campus indicates there is “clearly a large appetite among investors for commercial properties on the Westside.”
Sony is one of many entertainment industry tenants that have been driving demand for office space in Santa Monica, and Kilroy is one of several deep-pocketed local real estate investment trusts that have been upping the ante on property acquisitions.
But REITs aren’t the only ones buying, and office buildings aren’t the only properties selling in Santa Monica, according to principal Bob Safai of Madison Partners, a real estate brokerage based in Santa Monica.
Safai said investors and tenants of all stripes are going after all categories of commercial real estate in the city. As examples he cited sales deals involving two retail buildings and an office building that he and partners Matthew May and Lynwood Fields closed. They also pointed to a lease signed for space just east of Santa Monica in West L.A. for a new children’s restaurant chain that May described as “Hard Rock Cafe meets Chuck E. Cheese.”
The retail sales were for a store on Wilshire Boulevard at Franklin Street that is occupied by Stroud’s Furniture and a Thrifty Drug Store at 18th Street and Wilshire Boulevard.
The Santa Monica-based Welk Group bought the 28,500-square-foot Stroud’s building from a local family trust for $7.35 million. The Rite-Aid drug chain paid approximately $6 million for the 18,000-square-foot Thrifty building, which was sold by a Teachers Insurance and Annuity Association investment fund.
The office building that sold was at Sixth Street and Arizona Avenue and is occupied by Treasury Services, a developer of software for financial institutions. The 40,050-square-foot building sold for $8.4 million to DT Santa Monica L.P., whose partners are based in New York. The seller was Cambay Group Inc. of Walnut Creek.
According to May, the deals are a result of the simple law of supply and demand: There’s only a limited amount of space in Santa Monica and the surrounding area, and lots of people want it.
He said the Santa Monica and adjacent area is also a popular spot for retailers to try new concepts, like the new children’s restaurant called Cartoonsville, which signed a 10-year, $2.5 million lease for 13,000 square feet of space in the 12121 Wilshire building at Wilshire and Bundy Drive in West Los Angeles. May said the restaurant, slated to open in about four months, is planned as the first in a chain that will include a retail store, an amusement area, and a lounge where “parents can kick back while the kids are having fun.”
War Chest
A footnote to the Kilroy deal: The REIT raised $120 million in its Jan. 31 initial public offering and recently arranged a $150 million revolving credit line through J.P. Morgan & Co. for further acquisitions.
Other local REITs that have added to or announced plans to expand their coffers lately include Beverly Hills-based Arden Realty Inc., which filed a registration statement with the Securities and Exchange Commission to offer 10 million common shares, with proceeds going to buy nine Southern California office properties and to repay debt. And last week, the Santa Monica-based Macerich Co. said it raised $150 million in a debt offering, through debentures sold in Europe, with the proceeds going to retire existing debt and finance new acquisitions.
South Bay rebound
A computer company’s new lease at an office park in El Segundo is the latest example of how much the market there has recovered from the aerospace tailspin, according to Bob Inch, vice president of marketing at the 2.25 million-square-foot Continental Park office development on Rosecrans Avenue between Sepulveda and Aviation boulevards.
Inch said Peerless Systems Inc., a software developer that has signed a deal to expand from 29,000 square feet to a full floor of 46,900 square feet, is one of a host of companies that have expanded in the park as the economy has rebounded.
Inch said that deal improves the park’s vacancy rate to just under 5 percent. That’s a vast improvement from the park’s 35 percent vacancy rate at the depth of the recession.
According to Inch, the park was hit by a double whammy: the downsizing of aerospace and Continental Development Corp.’s construction of a 200,000-square-foot speculative office building in 1992, just when the recession was hitting hardest in the South Bay.
“At one time, we had about 800,000 square feet of space that was empty,” he said.
The rebounding economy filled some of the space, but Continental has helped its cause by knocking down about 200,000 square feet of research and development space that it figured would be tough to lease, building a 16-screen movie theater, adding some restaurants and completing an $8 million renovation to turn the park from single-tenant aerospace uses to multi-tenant buildings, Inch said.
The park has also been helped by its location, according to Jesse Laikin, a broker with the South Bay office of Lee & Associates who represented Peerless in its lease, a 7.5-year deal for $4.5 million.
“This is only about two exits south of the (Los Angeles International) airport on the 405 Freeway,” Laikin pointed out.
Laikin said the office vacancy rate is running from 15 to 18 percent in the market surrounding Continental Park, but the project has beat the overall market by adapting to the changing economy. He said the Peerless lease typifies that evolution: a computer-related company expanding in a park that was once the domain of aerospace firms.
