The Business Journal recently gathered several Los Angeles real estate professionals to discuss what makes for a successful project today, future trends and the increasing role of technology in real estate.
The panelists were: Shaul Kuba, principal at CIM Group, which has created a portfolio of street retail projects, including Santa Monica’s Third Street Promenade and San Diego’s Gas Lamp Quarter; John Long, managing partner and founder of Highridge Partners, which is involved in acquisition, development and finance on the commercial and homebuilding sides of the business; Jerry Porter, president of the brokerage Cresa Partners, one of the dominant firms representing dot-com companies; Jerry Snyder, president and founder of J.H. Snyder Co., a retail and office developer; and Michael White, partner at the architectural firm HLW International.
Question: How about some general observations about the real estate market and what’s working.
Long: California is head and shoulders above any other economy, primarily because we are on the West Coast, the center of this technological, Internet-based, e-commerce revolution. As such, we’re faced with the challenge of accommodating all those needs in real estate. On a more micro level, we have also in California really not had any significant development in the last decade. Until we build enough space again to cover that, we’re going to see escalating rents and people scrambling to do very creative deals. The challenge will be not so much in filling the buildings, but filling the buildings with people who are going to be the tenants of the future, as opposed to tenants of the past.
Q: What types of companies and projects are going to prosper in the years ahead and now?
Porter: The traditional 30-story downtown high-rises are less conducive to the type of work being done by today’s most successful clients. So the type of campus development that the Water Garden represents and what DreamWorks has done with its animation campus are the types of product that’s being asked for by the clientele we’re seeing.
I think the successful developers and brokers of the next decade are gong to be those who take the time to ask the questions and understand what the clients’ needs are, as opposed to what’s been built in the past. There’s a very formulaic development process; we’re not a terribly progressive industry. And I think the truly successful individuals are the ones who really see the future of the Internet and how our commerce is changing, and understand that the workplace is going through a huge transformation. It began with the entertainment companies, it’s being evolved by the Internet companies, and it is trickling down to corporate America. The idea of collaboration and teaming in the work environment is going to change from the inside out what commercial real estate is all about.
Long: In addition to the space you occupy, there’s also the environment you’re within. At Howard Hughes Center or our project in El Segundo, you have a proximate link to retail, to housing, to services, to entertainment, so in a way the infill creates an opportunity as opposed to a limitation. The challenge is for creative developers to somehow link the various parts of it so it becomes a unified approach.
Q: You’re anticipating more mixed-use development?
Snyder: I think you’re going to see more creative projects. In the retail market, we have a vast population that’s under-served in areas that need community redevelopment assistance. We’ll be doing a lot of that.
Q: Are you talking about the inner city?
Snyder: You could be talking about that, but we have a lot of inner city in Southern California, and there are areas in North Hollywood that need to be revitalized and areas near Vermont and Western.
Porter: Amenities are incredibly important. This city has historically been planned around large pockets of office space that are buffered as much as possible from the rest of life. What we’re really evolving to is a development economy where the office space is chasing the existing amenities. The challenge is going to be for people to understand that by distributed functions, office, retail and residential, that’s how we start reducing some of these commute times and create neighborhoods and community within this enormous expanse of Southern California.
Snyder: In areas that need redevelopment, you not only get the cooperation of whatever agency is involved, but you don’t have people running up and down saying, “no growth.” There’s no sense in beating your head against the wall and trying to do a high-rise or even a large project in parts of West Los Angeles. It’s over. On the other hand, there are areas where we’re working now where people say, “Yes, we want a Target in our neighborhood and a new Ralphs, and we’d like to see some campus office buildings.” That’s the market a lot of developers are going to go to.
Long: You have that really unique situation where people in business to make money can actually add to social improvement. That’s historically not always been the case.
White: One of the challenges is to deliver that product faster than we’ve ever had to in the past. And as an architectural firm, a challenge that’s different than before is that we have to have an intimate relationship with the real estate community and the city approval process. It’s a challenge that had always been there, but the hyper-speed these companies are dealing with has fundamentally changed. We’re having clients come in saying they need the space today, as opposed to three months from now.
Porter: To compound that, we have a huge number of clients that are 40 people today and maybe 400 people in a year. And as we look around our immediate client roster, we’re looking at thousands of new jobs, literally exploding in the next 24 or 36 months.
Snyder: I don’t think we’re going to be able to deliver product quickly.
Porter: One of the ways we’ve seen a lot of product delivered in the past couple of years is all the conversion of industrial space. It’s a change of use, not new construction. It’s hundreds of thousands of square feet of bow-truss warehouse buildings full of Internet companies. And so it’s those more creative solutions that have taken some of the pressure off.
Q: Tenants are just as happy in a well-done conversion?
Long: If not happier. They like that.
Porter: (to Snyder) You’ve been building supermarkets for the past five years. Those can end up being Internet office building, with on-site parking. Maybe it’s a recycling of an older generation of markets in areas that have been obsoleted by new product. But it’s going to be a more imaginative set of real estate solutions.
Kuba: People are looking for creative space, period, whether it’s residential, office or retail.
The Internet is another issue. They come and lease 10,000 feet and before you know it, you end up with 30,000 feet these guys are growing like crazy. The scary part is when you sit down and start looking at the economics and the way these guys are burning the money. Three years from now, you might end up with the space and nobody to pay the rent.
Snyder: But I think any prudent landlord is going to have enough letters of credit and guarantees, so we don’t end up with the one out of five who don’t make it. I don’t like those odds. We’re all being extremely careful.
White: We’re finding there’s a couple of generations that Internet companies go through. There’s the start-up Internet company that doesn’t have any capital. From an architectural standpoint, we’re getting them in with sawhorses and doors as their tabletops because they don’t have any money for furniture, and they get up and running as fast as they can.
Then you’re seeing the second generation, where they’ve gone through their IPO, they have some cash and they’re building out real space. They’re growing so quickly, they’re trying to get out of some of those leases in order to move into larger space, and the space they’re in they’re subletting out instantly. So there’s such an enormous amount of activity that the people that have the pre-built-out space are actually sitting on an amazing asset to sublet.
Porter: I think there are a lot of really silly dot-com ideas out there. I think it’s very likely we’re going to see a lot of casualties in the market over the next 18 to 24 months as some of the early-stage funding doesn’t get met with second-round funding. They’re taking lots of space in lots of locations and there will be some mortality. However, the overriding question is, are the winners not going to absorb every piece of that space?
One of the key strategies we’re employing for our stronger Internet companies is to make sure we place them in buildings and in complexes that have a lot of Internet startups in them. We have clients that are two floors today, and they need to be four floors next year, and they don’t want to be in a different city or building. So we’re matching up Internet companies, saying, “We don’t know which one of you is going to outgrow the space first, but we know one of you is.”
Snyder: You’re also going to see a proliferation of incubator space. We have people who come to us and try to take the whole building. They’re very sophisticated.
White: ECompanies is one on the Westside. They’re coming to us after we did their original space, probably every two weeks, with a new idea for a new company to go within the space they’re building out. These people are starting with four or eight people and growing and growing.
Kuba: Where we see things going forward is rebirth of urban development, whether it’s in San Diego, Huntington Beach, Santa Monica, Pasadena, almost any city. They’re all pushing the envelope on redeveloping the streets, creating a mix of housing and retail and office space. And I think going forward that’s where you’re going to see most of the development happening. It’s all being designed in such a way to accommodate mixed-use development.
Q: How important is it for real estate professionals to orient themselves to the various ethnic markets to succeed?
Long: On the housing side, you have to. You clearly need to house these people.
Snyder: And you need to feed them.
Q: Do the designs and product offerings need to be different to cater specifically to those ethnic markets?
Snyder: That’s exactly what the ethnic market does not want. The Hispanic market wants to shop at the same place as everyone else. They don’t want to have a market that caters to Hispanic people. They want a top-of-the-line Ralphs. They want to go to the movies and go to a Pacific Theatre in their neighborhood. The demographics are there. Retailers are interested in that. Now you’ve got to be creative, you’ve got to figure out how to go in there and do underground parking, and how to get the stores in, and apartments on top.
Q: Does anyone else agree ethnic communities want to shop at the national chains, or do they want to retain their distinction?
Long: I think they want to have the flexibility to do either that’s the key. They certainly don’t want to be isolated from society and from the mainstream. Certainly in the Asian community, there’s a strong sense of retaining an Asian culture. So the challenge is to combine the two into communities.
Porter: I don’t see the residential side of the business at all, but I see a lot higher level of assimilation at pure enterprise level. Culturally, business is business. We see culturally mixed businesses that don’t have a whole lot of ethnic personality. Our population is over 50 percent Hispanic in Southern California, so we are destined to be an assimilated society.
Kuba: What we have seen in a few communities, particularly the Hispanic communities, is those kids who grew up and went out of state to college are coming back and becoming leaders in their own community. One example is South Gate, which is almost 90 percent Hispanic. It’s a community that’s got a tremendous amount of density and income and buying power.
Q: Have you found the retailers are getting to be more receptive about locating in those areas?
Kuba: I think retailers are ready to go there. There’s no question they understand there is a market. The problem is, you have to build parking, you have to buy the land, and you have to put a building in and give tenant improvements and pay commissions. So by the time you’re done with all of that, if there’s no assistance from the redevelopment agency, a lot of times those projects are just not worth doing. And that’s the problem with those communities. They just don’t have the cash-flow stream that a lot of other communities have to be able to pull those projects together.
Porter: It’s sort of a chicken and egg. Without those facilities they don’t get the sales tax.
Q: From a design standpoint, do you see the ethnically diverse nature of Los Angeles having an impact?
White: I think the idea of keeping the sense of community and culture intact is very important, and having a sensitivity to that is no different than us having a sensitivity to a particular business culture, in the same way there’s a sensitivity to the Internet industry and how that’s its own business culture.
Q: With this whole technological revolution, tenants and homebuyers can log onto the Internet and see what the offerings are. What’s going to happen in the brokerage world?
Snyder: We’ve leased about 800,000 square feet in the last six months and everyone was represented by a broker. We don’t have people calling us directly saying, “We’d like 100,000 square feet.” Everybody’s got a broker. I don’t see that changing at all.
Porter: I think the role of a broker is changing. Finding buildings is not very hard. The role of the broker is putting information in perspective. Knowledge-based advisory skills will hopefully keep us compensated.
Snyder: The brokers are the lifeline of our business. Brokers today are far more sophisticated and do a much better job of representing their clients.
Q: Who is it out there who really impresses you in the business?
Porter: I guess our particular bias is toward technology and a group that’s new on the scene that is fundamentally changing our collective industry the information services side of real estate. There’s a whole array of Internet-based information services. It’s yet to be determined the full impact on our business, but it is probably the seminal change in our profession over the last several decades.
Kuba: I think the most impressive project or firm right now is TrizecHahn and the Hollywood & Highland project, a 600,000-square-foot retail project with the Academy Awards theater. It’s going to be amazing to see what it’s going to do to Hollywood. You can already see today how everybody is trying to position themselves in Hollywood, whether it’s the restaurant guys, retail, office or housing. And I think in L.A., this is going to be the most exciting project. This is where everybody’s going to come in to hang out and spend time, go to a movie, watch the stars. For office tenants, it’s going to be the most exciting place to work, where you can go down and enjoy the street, enjoy the boulevard.
White: One of the new companies that we’re very impressed with that’s going to chart the path for a lot of Internet companies is eCompanies. It’s an incubator company for the Internet. We think they’re going to be defining what the real estate solutions for the Internet will be because they’re starting so many new companies at one time. We see them treating the space as a creative environment for their staff with a goal of creating the most talented Internet staff out there, which is something that is part of the more mature generation of Internet companies.
Snyder: I think you’re going to see a lot more mixed use. We’re certainly going to do it. I think Rick Caruso does a great job. I admire his work. His Farmers Market is going to be an absolutely stunning project and great for our Miracle Mile area. So I see him as a leader and someone to emulate in the retail business. Rick spends a lot of time making his places look beautiful and they become town centers. The man owes me a commission for this.
Long: I think in terms of understanding where we are in the real estate world today and the transition into integrating it with technology, I’m impressed more with the academic side. At places like USC and UCLA, the kids are extremely creative and versatile in their thinking. So I guess that’s kind of where my vote is, to an institution, as opposed to an individual.