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Tuesday, November 25, 2008

Market Shift Will Create Opportunities for Tech Companies in 2009

from O. Jacob Bobek and Scott D. Steuber, Cushman & Wakefield





With the down-turn of the local and national economy, there has been a shift in the Los Angeles commercial real estate market. More attractive officing opportunities for technology companies are pouring into the market. Early to mid staged companies can now expect lower occupancy costs, more lease flexibility and better locations leading to better talent recruitment.

Los Angeles based technology companies tend to locate in West Los Angeles, the Conejo Valley and along the 210 corridor office markets.

While vacancy rates in West Los Angeles submarkets such as Century City and Westwood remain somewhat stable, a different story has been brewing in submarkets such as Santa Monica, Culver City, El Segundo and Marina Del Rey over the past 12 months, with vacancy rates climbing in these markets.

One could argue that the Conejo Valley is further depressed than the West Los Angeles submarkets, specifically resulting from the struggles and layoffs of Conejo Valley based Countrywide Home Loans and Amgen, two of the largest employers in greater Los Angeles.

The 210 freeway corridor market and the Pasadena submarket have been impacted by the collapse of two of its largest office users, Indy Mac and Fannie Mae, causing vacancy rates to increase in this market as well.

One would think that increasing vacancies would lead to decreasing rents, right? Well, not yet. Come 2009, rents will follow their historical inverse relationship to vacancies leading to many opportunities for young and thriving technology companies.

You may ask; other than lower rents, how else can my company benefit from a regressing real estate market? Here are the top 5 ways a technology company can benefit from the current market:

5. Renegotiate your existing toxic lease terms: This market will present an opportunity for companies to renegotiate current lease terms including personal guarantees, high security deposits, and above market rents even with long term remaining on the lease.

4. Little or no lease securitization: Since sublandlords are looking to stop the bleeding and direct landlords are starting to become nervous about increasing vacancy rates, young companies will be able to secure office space without the demanding personal guarantees, security deposits, or letters of credit.

3. Increased flexibility without the rent premium attached: Short lease terms along with options to expand or contract typically have led to higher rents and therefore have been almost unattainable in our recent market. With vacancies increasing landlords will be more open to flexible lease terms without charging a significant rent premium.

2. Move-in ready office space at discounted rent: With a surge of subleases entering the market in pristine condition, lean technology companies can find “cool and creative” space without the high capital requirements typically required for a build out or furniture.

1. Better locations at better rents: Top tier markets that had priced out early to mid staged technology companies will now once again be considered as part of the consideration set. This should lead to better recruitment since the company with the better location and better working atmosphere is most often times the winner in the battle for talented and experienced employees.

Jacob Bobek (Jacob.bobek@cushwake.com) is associate director and Scott Steuber (scott.steuber@cushwake.com) is an associate at Cushman & Wakefield in Los Angeles. Cushman & Wakefield, the world’s largest privately held real estate services firm, delivers integrated solutions by actively advising and implementing on behalf tenants through every stage of the real estate process




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