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Saturday, June 23, 2007

The Changing Startup Real Estate Landscape For Los Angeles

from Scott D. Steuber and Ted Simpson





One of the cornerstones of the California high-tech mythos is that many of the top companies were born not in Class A office towers, but in kitchens, garages and converted warehouses. Of course, once they received funding and grew their businesses, they moved out of their humble digs and into more appropriate office space. In the process, they created technology “clusters” throughout Southern California.

Ironically, as these centers grew in importance and stature, the rents went up, and today many emerging technology companies are “priced out” of the very neighborhoods that are synonymous with high-tech innovation. Today’s start-ups and even more established companies are moving into some areas that weren’t on anyone’s radar even a year ago. In the process, they are creating new technology centers that could change the face of the industry in the Los Angeles area.

The number of low-rent “sub-market” havens attractive to tech start-ups looking for a “creative” environment has expanded over the last couple of years to the north, south and east. This trend has been developing because tenants’ top choices of the past do not offer the attractive economics that they once offered.

A perfect example of this principle at work is San Francisco-based Wired magazine, which was one of the first “new economy” companies to set up shop in the city’s decrepit SoMa neighborhood. Legend has it that the magazine rented its cavernous space for less than a dollar a square foot in the early 1990s, but at the height of the dot-com boom the area became so popular with start-ups that rents in old warehouses equaled top-quality space in the financial district. Not surprisingly, companies that couldn’t afford the inflated prices looked elsewhere, and new technology hubs across the Bay were born in places like Emeryville and Alameda.

Here in Southern California, the bargains of yesteryear that could be found in industrial areas or B- and C-class buildings in pricier markets such as Santa Monica no longer exist, as such certain submarkets have seen vacancy rates dwindle to low single digits and rents in some buildings increase to upwards of 10% per quarter. Even submarkets on the perimeter of the pricier West LA market (such as Culver City’s Jefferson Blvd corridor and Marina del Rey) have experienced declining vacancy rates and rising rents, forcing tenants to look elsewhere.

Start-up technology companies looking for a suburban low-rise creative feel are being pushed into markets that in the past had been avoided mainly due to the lack of convenience and accessibility. These markets include El Segundo to the south, Calabasas and Thousand Oaks to the north, and Monrovia to the east. Even these “new” markets of choice have recently seen vacancies slip to single digits, and rents have started to climb. The day may be near when tenants will have to consider Downtown LA, Glendale, and even LAX!

Before you despair about not being able to afford a 13,000-square-foot loft in Santa Monica, there are some good values in the market – if you’re willing to look in non-traditional areas. Rents in Culver City are somewhat reasonable, with vacancy rates at about 5 percent. Just 10 miles away in El Segundo, where vacancies are at 19.5 percent, there are more options from which to choose and companies can save significant cash due to rents that are significantly lower than its neighboring markets.

And for folks who feel priced out of trendy Pasadena, they only need to travel a few miles down the 210 Freeway for lower rents in Monrovia. And while an East Huntington Avenue or North Sepulveda address might not have the cache of Los Robles or the Water Garden, the constant shifts in the technology industry just might turn these thoroughfares into the next LA hot spots for technology entrepreneurs.

Ted Simpson (ted.simpson@cushwake.com) is executive 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, implementing and managing on behalf of landlords, tenants, and investors through every stage of the real estate process.


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