Western Real Estate Business

COVER STORY, APRIL 2005

CENTERS OF ATTENTION
Conversions, job growth and new infrastructure alter the makeup of many of the West’s downtown office markets.

Mark Tarczynski

Western Real Estate Business recently contacted several brokers to see how downtown office sectors in the region are performing. Adaptive reuse ordinances, public works projects and long-awaited job growth are dynamics creating interesting market opportunities from Phoenix to Portland.

Los Angeles

Downtown Los Angeles is continuing its powerful renaissance that began in the year 2000. With the city council’s passage of the Adaptive Reuse Ordinance (ARO) in 1998, housing developers saw an opportunity to profitably acquire pre-1974-built office and industrial buildings and convert them into live/work apartments and condominiums. Additionally, large pension funds like CalPers and CalStrs began to target a larger portion of their real estate investments toward urban redevelopment or “smart growth.” The convergence of pension fund investment into urban redevelopment and the passage of the ARO, combined with Los Angeles’ chronic under-supply of housing, all contributed to the current explosion of housing development in downtown.

Just how big is the explosion of new housing development? In 1988, downtown Los Angeles boasted a mere 2,400 housing units available for a work-force population of nearly 500,000 people. Today, there are nearly 10,000 housing units available for downtown’s work-force population. Nearly 5,000 of those housing units were brought on line in the last 5 years. Another 5,000 new housing units are expected to receive their certificates of occupancy in the next 24 months, and an additional 10,000 new housing units are in the planning and permitting stages and are expected to be added to the CBD’s housing stock by 2009.
Will converting all those former office buildings into housing product reduce downtown Los Angeles’ office space supply? Not likely. The largest supply of office-conversion-to-housing has occurred in the Class C category. Most of these Class C buildings were not up to current building codes and thus were unoccupied.

In 2004, Los Angeles’ first Class A office tower, 1100 Wilshire, was acquired by the partnership of RAD Management, TMG and Forest City Enterprises to be converted into housing condominiums. 1100 Wilshire’s conversion from office to housing removed 326,000 square feet of office supply from a market that measures nearly 32 million square feet of Class A and B office space. Additionally, the partnership of CIM Group and Lee Group are converting into condominiums the upper half of the Class A office tower at 801 South Grand Avenue. This conversion removes an additional 200,000 square feet of office supply from the market — hardly a tsunami of conversion from useful office supply to housing.

That said, it is widely believed that downtown Los Angeles’ 300 percent growth in available housing stock will attract a highly affluent and educated pool of workers. The explosive growth of highly educated employees downtown will be attractive to companies that are smart enough to recognize that transportation will become a key issue for business in the next 20 years. Hence, it is expected that downtown L.A.’s annual net office space absorption will begin to markedly improve as companies relocate closer to where the available work force is living.

In Los Angeles it takes nearly 6 years to acquire land, entitle it for an office building, plan and obtain the necessary permits, and then build it. Hence, it is quite possible that in the not-so distant future, downtown Los Angeles will see demand for office space eclipsing existing supply, thus driving an increase in rental rates somewhat beyond normal inflation.

— Mark Tarczynski is a first vice president at CB Richard Ellis in Los Angeles.