The dot-com meltdown has left as much as 2 million square feet of office space available on the Westside and the only buildings escaping the carnage are the ones that avoided Internet tenants.
Hardest hit has been the city of Santa Monica. As the town recovered from the recession with office and hotel construction and the emergence of Third Street Promenade, tech- and entertainment-related businesses stormed the beaches. Not all of them made it.
“The market has changed. There’s decent activity, but it’s changed,” said David Toomey, a senior vice president for Cresa Partners, who works the Westside. “We used to have multiple tenants looking at the same space. Now the tenants have the luxury of negotiating with multiple landlords.”
What’s commonly called the Olympic Corridor the stretch of Olympic Boulevard between Kilroy Realty Corp.’s Westside Media Center in West L.A. and Santa Monica’s Special Office District there is 800,000 square feet of sublease space available.
Some of the companies and the large blocks of space they recently put back in play include:
– Dunk.net, 20,000 square feet in Santa Monica;
– Stamps.com, 60,000 square feet in Santa Monica;
– Etoys, 150,000 square feet in West L.A.;
– Sapient, 150,000 square feet in Santa Monica;
– MarchFIRST, 150,000 square feet in Santa Monica;
– Careerpath.com, 37,000 square feet in Westwood.
The Sun America building at 1999 Ave. of the Stars and Fox Plaza in Century City, and 100 Wilshire in Santa Monica, boast full or near-full occupancy. All stayed away from dot-coms.
Robert Flaxman, president of Crown Realty & Development Inc., said his 330,000-square-foot Wateridge development at Slauson Avenue and La Cienega Boulevard has a 2 percent vacancy. There’s also a new 200,000-square-foot phase of the project currently under construction and due for completion in November.
Flaxman said that Wateridge filled up with stable, non-Internet tenants such as AT & T; Broadband (formerly MediaOne), Pacific Bell Telephone Co., MCI Worldcom Inc. and American Express Co. He only has 3,000 square feet of dot-com tenants. Crown Realty has succeeded, in part, by offering rents at 30 percent below the going Westside market price for comparable space, Flaxman said.
The Internet bloodletting started a year ago this month, when investors in the tech-heavy Nasdaq exchange started deciding they preferred investing in profitable companies. Steadily, venture capital began drying up, dot-coms had to start cutting overhead and landlords became wary of unstable tenants.
Dynamic process
Working a lease deal for an Internet company always was a dynamic process, according to Steve Solomon, senior vice president at Colliers Seeley International Inc.
“All of those tenants, if you were to talk to them 18 months ago, had requirements for 20, 40, 60 people, and when we were done with the deal they were going to have 600 employees,” Solomon said. “Now all the tenants are in space, but they’re downsizing tremendously because Wall Street’s telling them to.”
Eric Olofson, senior vice president and managing director at Cushman Realty Corp., said he’s already seen the market softening. He said Sapient Corp. is asking $3.25 per square foot per month for its space at Water Garden II, when the company paid close to $4 a foot when it moved in.
“The Water Garden (complex) was in the high-$3, low-$4 range,” Olofson said of the boom days in Santa Monica. “Sublease space is offered at $3.25 and I’ll bet you could get a deal for $3.”
But despite the heightened competition, optimism remains for some.
Robert Peddicord, senior vice president of leasing for Arden Realty Inc., said his company lost some tenants and found itself with chunks of sublease space. Somehow, though, the vacancies thus far have disappeared just as quickly as they appeared.
IXL Inc., an Atlanta-based Internet consulting firm, had a brief stay last fall at Arden’s Howard Hughes Center in West Los Angeles. Within months of signing a 10-year, 75,000-square-foot deal for a reported $30 million, IXL announced it was restructuring and pulled the plug on the Los Angeles office after paying Arden $4 million to buy out the lease.
Replacement tenant
While IXL was bailing out, another Howard Hughes Center tenant was deciding to dig in. Torrance-based Havas Interactive (now Vivendi/Havas Interactive) already had 75,000 square feet of space in Arden’s building and wanted to consolidate its corporate and software development operations there. The company quickly gobbled up all four floors of IXL’s abandoned space for a reported $36 million over 10 years.
“We have actually benefited from what has happened,” Peddicord said. “We have replaced struggling tenants with stronger ones.”
Peddicord acknowledges that there are significant pockmarks of sublease space around the Westside, but calls it a “healthy equilibrium for the market.”
While tenants looking to fill their space could lose money, a landlord can come out ahead when a tenant decides to bail out. In Arden’s case, IXL paid Arden a reported $4 million and returned the space for Arden to lease directly. The landlord got the buyout cash and is not losing any rent.
Of course, a more usual scenario is that the sublease space the tenant is trying to unload ends up competing against the landlord’s more-expensive direct-lease space a situation that the landlord is obviously not pleased about. Also, having an anchor tenant bail out due to financial difficulties can stigmatize a building’s image somewhat, at least in the short term.
Some Westside landlords have protected themselves a bit, however, because they required dot-com tenants to put up a letter of credit as security. Several landlords are now using those letters of credit to cover any downtime between a tenant going belly-up and a new tenant being signed to take over the space.
