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In Full Swing

When startup Hooky Interactive Inc. outgrew its 4,000-square-foot Marina del Rey loft after only a year, the online marketing firm searched the Westside for three months for new digs befitting its creative bent.

It didn’t have to look far.

In January, it moved four miles away into 10,500 square feet in Bergamot Station, a converted train depot in Santa Monica popular with a new breed of creative tech companies. And it’s easy to see why.

Hooky’s office is replete with high exposed ceilings, a wooden gym floor where employees play games, and, if that weren’t enough, room for a tire swing where employees can channel their inner child.

“When your (company’s name is) based on the idea of skipping work, it has to be fun, like a playground,” said Hooky Chief Executive Jon Ruppel. “Getting a spot in Bergamot Station was kind of a dream come true.”

Welcome to the latest tech hot spot: a city that has long been known for its beachside locale and hip shopping districts – as well as politics so liberal that it’s been derided as the People’s Republic of Santa Monica.

The city is earning a wholly different nickname as startups like Hooky, and social networking and other tech firms vie for the city’s sunlit offices and creative campuses.

That new nickname? Silicon Beach.

What started with only a handful of tech companies during the last decade has turned into a veritable flood over the past year. Companies such as video game developer Riot Games Inc., e-commerce site BeachMint and online employee rewards firm BetterWorks have all opened offices recently.

In fact, as detailed in this Real Estate Quarterly, Santa Monica was the only Los Angeles County submarket in the second quarter to post a vacancy rate below 10 percent as 210,000 square feet of space was taken off the market – about half of all office space absorbed countywide.

The demand has sharply pushed up Class A average asking rents to $4.63 a square foot, 25 cents higher than the first quarter. But what’s particularly in demand is cheaper creative office space – such as former industrial buildings with high ceilings, big windows, large rooms and exposed brick walls – where rents can run for half as much.

Santa Monica has about half of the Westside’s 17.5 million square feet of creative space, and local brokerage Industry Partners estimates its vacancy rate was just 5 percent in the second quarter. That’s less than half the 13 percent vacancy rate for creative space in the second quarter last year.

“It’s amazing to see the 180 degree difference,” said Randy Starr, chief executive of brokerage Starrpoint Commercial Partners, who represented BeachMint in its lease of 14,000 square feet last month on Fifth Street.

Industry cluster

Santa Monica has long been popular with the hip tech crowd and the reasons are obvious: popular amenities such as the beach and the Third Street Promenade combined with quality restaurants and accessible public transportation are hard to match elsewhere. Companies also like the desirable executive neighborhoods and the proximity to UCLA, which produces a bevy of eager young engineers and programmers.

It’s those kinds of attractions that brought Yahoo Inc. to Santa Monica in 2005. The web portal was the first major Silicon Valley tech firm to open a corporate office in Los Angeles. Like the Silicon Valley firms that have followed it, the company also wanted to be close the entertainment industry to strike content deals. Among Hollywood companies with major operations in Santa Monica is DreamWorks Studios.

When News Corp. and NBC Universal founded online TV and movie streaming service Hulu LLC in 2007, its offices were strategically located in north Santa Monica’s Media District.

To a certain extent, the current companies are playing follow the leader, but that only partly explains what’s going on.

Ruppel and friend David Hays, both with advertising backgrounds, started Hooky Interactive in 2008 in a small Marina del Rey loft on a short-term lease. The company offers consulting and production services to companies seeking to develop sophisticated online ad campaigns. Within six months of its founding, Hooky had signed Fortune 500 clients, including Burbank’s Walt Disney Co.

The company grew quickly, expanding from two to 13 employees in two years. Earlier this year, the pair signed a five-year lease at Bergamot Station at a rate they would only say was below market rent. They also received a $50,000 tenant improvement allowance that was used for a new kitchen, work stations and carpeting. But that wasn’t the main attraction.

“We made a lot of our decision on the cool factor and that wow moment upon walking into the space. We knew we wanted a large space that would help us grow and were looking for natural light and great proximity to restaurants,” Ruppel said.

“The cultural hub of Santa Monica (also) seemed like a perfect fit. It’s interesting to be saddled up with these types of organizations like ours. There’s an excitement and synergy,” he added.

Talk to others in the industry and they repeat what Dekeratry and Ruppel say: a big attraction of Santa Monica is the tech milieu that has developed. Employees from different companies can easily interact over face-to-face lunches, or bump into each other at local bars and clubs after work.

“The culture has taken on a turn for the better,” said Ruppel. “People feel free to explore other artistic things outside of our business. It’s a good place to talk and communicate.”

Santa Monica, meanwhile, is doing what it can to promote itself, including offering fiberoptic Internet connections that provide bandwidth unparalleled by private companies.

“Whether you’re tech or creative arts and you need to move huge amounts of information all over the world, and do it consistently, we offer that capability now,” said City Manager Rod Gould. “It will help us compete with other megacities in the world and other regions in the world where tech is.”

The free market is fostering its own attractive environment for startups. Downtown Santa Monica has seen the popping up of “co-working” spaces, where lone entrepreneurs, startups or freelancers can rent space.

Early last year, computer programmers Cameron Kashani Rasouli and Avesta Rasouli opened a shared office space called CoLoft for creative tenants. They also hold startup workshops and networking events. The couple is negotiating to double their 3,200-square-foot space by the end of the year.

“We were sick and tired of working alone and believed if you put entrepreneurs around each other more amazing things happen,” Kashani Rasouli said. “We really want to be a steppingstone on people’s path to success.”

Today, CoLoft has 100 members, who pay between $35 and $550 a month. It fostered social media streamlining service Mingly and geo-location-based social networking site UseHipster.com, both of which moved out to their own offices in the past year.

Venture funding

Something else also has spurred the growth: investor interest.

Though venture capital funding is still slow, county companies received $201 million in the first quarter, according to a survey by New York-based consulting firm PwC. And those with some web component grabbed much of the bounty as investors sought out the next Facebook Inc. or Groupon Inc.

In Santa Monica, style-matching e-commerce site BeachMint received $28.6 million in the first quarter from angel and other investors. Online video conferencing service Vokle Inc. has received $1.26 million from Pasadena’s Tech Coast Angels.

“Effectively, it’s 1996 all over again with tremendous shareholder value creation,” said Lou Kerner, an analyst with L.A. boutique investment bank WedBush.

“I’m calling it ‘The Second Internet.’ It’s the social Internet. It changes everything. It’s like the first movies; they were silent and then one day they were introduced to sound and it started this new boom,” he said.

One of Santa Monica’s largest landlords is Equity Office Properties, which owns 2.7 million square feet in the city, including the office park at Broadway and 26th Street where Yahoo moved and is now called Yahoo Center.

Tech companies comprise 50 percent of Equity Office’s new and expanded leases citywide so far this year. Equity Office would not disclose if that demand has raised rents, but according to CoStar Group data, the average monthly rent per square foot at Yahoo Center is a pricey $4.21.

“Tech companies are definitely attractive tenants to have. A lot of them are financially sound but also have growth expectations,” said Brendan McCracken, vice president of leasing for Equity Office.

Vokle, which doesn’t lease from Equity Office, is an example of a funded company in full growth mode. The founders developed an online video-conferencing website, and were early arrivals in the city.

“In mid-2008, right before everything went down financially speaking, we were working out of my apartment here in Santa Monica and there wasn’t really a tech scene in L.A.,” said Edward Dekeratry who co-founded the company with partner Robert Kiraz.

“Eventually we started looking for space and funding and ended up choosing a space above (vegetarian restaurant) Real Food Daily,” he said. “The only reason is we liked the building; exposed brick, hardwood floors, nothing corporate. We moved there and the scene started to form around the Santa Monica space and more companies started coming around.”

Vokle started in a 500-square-foot office and moved into a larger 1,150-square-foot unit within its 506 Santa Monica Blvd. building this year. Dekeratry would not disclose the lease rate, but said it’s significantly lower than Class A space.

Traveling to Venice

But no matter how attractive the market, companies can’t move where there’s no space. And there are quickly becoming fewer available creative offices with the square footage necessary for expanding companies.

“They’re just fighting for space left and right. Nobody wants to leave this area and we’re running out of space,” said Starrpoint broker Starr.

It’s pushing the companies to look farther south. Consider Google Inc. The search engine giant has been in Santa Monica since 2003, and wanted to consolidate its offices around the city. As it sought out 100,000 square feet of creative space, the company was forced to explore Venice.

Google ended up leasing 100,000 square feet in the Frank Gehry-designed Binoculars Building on Main Street in January. The deal, valued at roughly $42 million, will bring all its 300 local employees to Venice when it moves later this year. The action has had a ripple effect on the market.

Brokers said it’s no coincidence that after Google announced its lease, the vacancy rate in Venice began to drop.

“Google is such a big name and people have a tendency to follow trends: If Google is going there, then we should go there, because Google knows what the heck they are doing,” said Denise Fast, a ReMax Realtor in Venice.

Price and space are not the only reason that some companies are choosing to look outside of Santa Monica. Venice is home to hip Abbot Kinney Boulevard, whose boutiques and restaurants have made it a desirable address for tech companies.

Mobile app creator CheckPoints, mobile video messaging service Mogreet Inc. and interactive media agency Almer/Blank have moved onto or near the boulevard in the last year or two.

“Abbott Kinney is the melting pot that gets these smart startup people excited about living in a place and working there, too,” said Todd Dipaola, co-founder of CheckPoints, which has about 4,000 square feet on the street.

One thing that could alter the dynamic is the traditional Achilles’ heel of the L.A. economy. Once a company becomes big and successful, it can get bought by a larger out-of-town firm, which often means the local operation is moved.

It’s not just a theoretical concern with this latest wave of tech companies, however. Hulu is actively being shopped around by its corporate investors. But broker Dave Toomey, a principal at CresaPartners who has placed several tech tenants in the market, has a different take on the matter.

“Even if they get sold at some point in the development stage, in many cases the company that is buying them is buying the expertise of the team that’s in place and so they fund additional growth in this marketplace,” he said.

Meanwhile, companies that were looking for Santa Monica space are eyeing the space Google will be vacating. Starr said he has already taken a handful of potential tenants on a tour.

“By the end of the year, it’ll be the lowest vacancy rate Santa Monica has seen in 20 years. I’m literally at where I have a larger demand of more tenants looking for space than is actually available,” Starr said. “It’s definitely the Internet frenzy again.”

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