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Monday
Jan062014

From High Rises to Hip Neighborhoods: LA’s Shifting Commercial Real Estate Market

This Class A office building (right) and five story empty warehouse (left) both sold for similar prices per square foot in 2013.

Over the course of the past year, the Los Angeles real estate market has shifted. Recent trends reveal that prime commercial real estate markets in the city are in competition with non-traditional neighborhoods, many of which are attracting start-ups with a unique formula of lifestyle oriented amenities. The sales of the U.S. Bank Tower, located on Bunker Hill in central downtown, and The Desmond Building, only five blocks to the south, clearly illustrate this shift in the market.

Although the two buildings are at opposite ends of the class spectrum, they sold for surprisingly similar prices per foot. The Desmond sold for $210 per square foot (but needs another $150 per foot to be leasable) and the Tower for $260 per square foot. To put this into perspective, it must be acknowledged that the U.S. Bank Tower is a prestigious 72 storey Class A office building, while The Desmond is a five storey brick warehouse that currently lacks elevators, bathrooms, heating, and other basic systems necessary for occupancy. Throughout it’s nearly 100 years in existence, the building has served as a car dealership, assembly plant, and, most recently, a department store warehouse. Lincoln Property Corporation, the company who purchased The Desmond, is currently converting the building into creative office space with the potential for new ground floor restaurant and retail space, as well as a rooftop bar.

The logical question in response to these sales is why are tenants and developers willing to pay higher prices for buildings like The Desmond than traditionally esteemed workplaces, and class A office space, like the U.S. Bank Tower? The answer lies in the fundamental shifts taking place within the American economy, as well as the changing preferences of next-generation urban workers.

Historically, white collar companies such as law firms, consulting groups, and accounting firms have driven the commercial real estate market. Typically, they valued the status of high-rise buildings located in central business districts. Their demand for such office space catalyzed the development of districts like downtown Los Angeles. However, in the past decade, professional service and law firms have consolidated into smaller leases and reduced their real estate portfolio. Consequently, the Class A buildings that have long provided workspace for these companies have seen a reduction in occupied space. Currently, there are 161 vacant floors in Class A office buildings within downtown Los Angeles.

Many developers and architects are aware of this shift in economic circumstances, but assume that as professional services firms reduce their office space, companies in the emerging tech, media, and gaming industries would take their place. However, companies within the emerging market sectors are demonstrating that they have limited interest in high rise commercial office buildings. Instead, they’ve been paying a premium for more authentic and flexible space, such as what’s found in low-scale industrial buildings in many cities.

Employees within these emerging market sectors tend to work differently. These generally younger employees value informal, open space filled with personal amenities. They want to work collaboratively in a space that allows them to feel like they’re part of community with a shared purpose. In terms of locale, they tend to prefer genuine urban environments that are easily accessible to a variety of restaurants, shops, gyms, and parks. Tenants recognize the potential influence both space and location can play in attracting, engaging, and retaining top talent. For these reasons, developers and tenants are willing to pay up to twice the rent for flexible low-rise buildings that can be re-purposed and can cost half as much to build.

Due to this market shift, real estate in neighborhoods known for their urban authenticity is in high demand. Districts like the Historic Core, the Arts District, and now South Park are valued for their potential for growth, their close proximity to a plethora of popular restaurants and entertainment venues, as well as their accessibility to numerous freeways, the Metro, and the Downtown Streetcar.

What does this market shift mean for developers? Firstly, it means it would be beneficial for them to be mindful of older buildings like The Desmond going on the market. These buildings have the potential, given the right mix of interior and architectural design intervention services, to be transformed into something else entirely. Secondly, if Class A buildings want to maintain relevance and attract companies in emerging market sectors, they need to re-evaluate how they present themselves to possible tenants.

One possible avenue is to reinvent the ground floor. Since workers today want to feel like they’re in a diverse urban environment, the mono-functional lobbies consisting of a concierge, a bank of elevators, and a small convenience store are opportunities for transformation. we’re proposing ground floor interventions (in qualifying Class A buildings) that turn traditional lobbies into mixed-use environments featuring a variety of amenities, including gyms, bars, restaurants, and co-working suites. Such lifestyle oriented enhancement mixes can create the urban environment start-ups want and reinvigorate the staid image of high rise commercial office buildings. While we believe that creating mixed-use districts in traditional office buildings is a possible solution, there are certainly others.

As we start to notice more opportunities in the upper floors of office towers, we have to wonder; what if hotels, schools, and restaurants re-occupied these obsolete single-use towers all over the United States? How does that change financing structures? Ownership structures? Physical infrastructural requirements? How will new towers be designed to accommodate inevitable future changes? Just some questions to think about as we look to 2014 and beyond.

John Adams' unique combination of design, planning, management, and real estate strategy experience in urban mixed-use redevelopment, corporate campus and entertainment projects give him a uniquely comprehensive understanding of large development projects. Contact John at john_adams@gensler.com.

Reader Comments (3)

Great article John. We are looking at similar trends over here in New York.
01.7.2014 | Unregistered CommenterAndrew Juiris
Great insights, John. I'll be thinking about these very things in 2014 in addition to even more basic issues like how buildings are measured and compared in a consistent way in order to highlighting the very trends you're witnessing.
01.10.2014 | Unregistered CommenterDavid Willett
Quite an interesting article! I add that this shift in from high-rises may possibly have some basis in the events of 9/11 that devastated our nation. Start-up Entrepreneurs, I safely assume, are not willing to risk their investment in such buildings in case of another terrorist attack. Plus with more emphasis on the 'Greening' of America one can surely understand the new motto of 'Reuse/Recycle/Repurpose' which is likewise occurring in housing markets around the world. Today's employees I glean, are no longer interested in traditional corporate autonomy which they have sorely witnessed its detriment to not only our economy but to their own personal livelihoods. Overall, Americas' future is fast-changing as individuals begin to truly see the true circumstances from recent political backslashes and decimated lifestyle funding. And as they say "real estate is cyclical.....then same with all else"...The Circle of Life! Actions create consequences. What one hand does....etc.
08.29.2014 | Unregistered CommenterDee Colbert

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