Downtown Office Market Makes Strong Comeback

By Ed Moosbrugger

January 3 -- Downtown Santa Monica’s office market is the strongest it’s been since the dot-com boom of the late 1990s, bringing smiles to the faces of landlords and challenges to potential tenants.

“The market is getting really tight,” said Eric Broida, principal of Broida Commercial Brokerage.

That’s reflected in lower vacancies and higher rental rates

“It’s more of a landlord’s market” than a year ago, said Randy Starr, a principal in Tenzer Commercial Brokerage. “It’s like it was at the peak of the dot-com era. Rates are shooting up. Vacancies are minimal.”

But the market doesn’t have the feeding frenzy feel of the late 1990s.

“It’s not a crazed market,” said John Warfel, a principal in Metropolitan Pacific Commercial Real Estate Services. “It’s a very healthy market. Lease rates are moving up.”

Downtown’s special appeal to creative businesses, and owners and employees who like the atmosphere, have played a big part in the strength of the market. So has the minimal amount of new office building construction.

Starr cited several factors, including the overall health of the economy, the strength of the Third Street Promenade, entertainment and the revitalization of the tech sector.

He noted that the MySpace.com Internet company now occupies almost half of an 80,000-square-foot building in Downtown.

Downtown Santa Monica’s amenities appeal to a young demographic, the 22 to 40 age range, of employees of such businesses, Starr said.

And that makes it easier for employers to attract workers, according to Warfel, a vice chair of the Bayside District Corporation Board, which runs the Downtown.

“People really want to be in the Downtown Santa Monica environment,” Warfel said. “Employees really like being here. You can do everything on foot.”

The appeal of having many restaurants, stores and other attractions within walking distance is one of Downtown’s strengths.

“It’s great for businesses that entertain customers,” Broida said. “It’s a fun place. But you have to pay for it.”

Lease rates are definitely on the rich side Downtown, ranging from as low as $2 a square foot to as high as $5 or more in prime Ocean Avenue spaces, brokers report.

The typical range is probably $2.75 to $3.50 a square foot a month, Broida said.

Vacancy numbers are harder to come by, but Starr estimates vacancies at 5 to 7 percent, which is very low. Some of the vacant spaces are odd spaces that are difficult to lease, he said.

Among types of tenants helping to fill these buildings are entertainment companies, advertising agencies, Internet firms, architects, design firms and real estate finance companies, brokers report.

“It’s still mostly creative users, but it’s not just post-production houses,” Broida said.

Downtown Santa Monica isn’t alone in experiencing a tightening office market.

Various regional reports show office rents on the rise and vacancies falling. The Westside has been particularly strong in both absorbing space and maintaining high rental rates.

With the strong market, it’s perhaps surprising that there’s not more office construction in Downtown Santa Monica, real estate experts said.

“The construction boom now seems to be apartments,” Starr said.
Warfel has an explanation.

“Right now, the way the entitlement process is set up, it’s much easier to get housing approved,” he said. “The entitlement process is set up to encourage housing. Most of the office developments have fallen by the wayside.”

The new apartment buildings are feeding off the office market, according to Starr, with many young professionals choosing to work and live in the Downtown grid, giving it a Manhattan-type lifestyle.

At an apartment building Downtown that Warfel’s firm manages, many of the renters are there because they work close by, Warfel said.

While things are looking good in the office market, one problem persists: inadequate parking.

Downtown office users hope the City’s planned expansion of public parking will alleviate the shortage.

“They definitely need to build more parking,” Starr said.

Warfel, who has been heavily involved in Bayside District efforts to address the Downtown parking situation, believes the City’s ambitious plan to add 1,712 parking spaces by 2015 will go a long way.

SANTA MONICA HOTELS posted an occupancy rate of 72.2 percent in November, down 1.4 percent from a year earlier, according to PKF Consulting. The average room rate jumped 11.8 percent to $254.81.
For the first 11 months of 2005, the occupancy rate edged up 0.3 percent to 79.7 percent, while the average room rate rose 8.9 percent to $234.63.