Hollywood Seediness Fades as Developers Remake Media Hub

Hollywood, a Los Angeles area once so seedy that Julia Roberts walked its streets as a prostitute in the movie “Pretty Woman,” is now undergoing the biggest surge of real estate construction in almost four decades.

Developers are building about 1.1 million square feet (102,000 square meters) of offices, retail space and apartments, and will begin construction of an additional 1.42 million square feet within a year, said Brian Folb, co-owner of Paramount Contractors and Developers, a Hollywood-based builder and property manager. Demand from the media, entertainment and technology industries are driving projects by companies including J.H. Snyder Co., CIM Group and Kilroy Realty Corp. (KRC)

“Hollywood is in a situation where its still-ongoing gentrification presents a great opportunity,” said Thomas Dujovne, chief investment officer at Los Angeles-based J.H. Snyder, which is building Hollywood’s first new office building in three years. “Many investors feel like they have found this little gem in L.A. that is very accessible and that is still, in relative terms, underdeveloped.”

The 19-square-mile (49-square-kilometer) Hollywood area, home to the annual Academy Awards, Grauman’s Chinese Theatre, the Capitol Records building and the Walk of Fame, was seen as having “prostitutes on every corner” as recently as 10 years ago, said Leron Gubler, president and chief executive officer of the Hollywood Chamber of Commerce. Now it’s one of a handful of U.S. markets where construction cranes, developers’ temporary fences and signs with artists’ renderings of buildings can be seen on multiple city blocks.

The amount of space being built is the most by square footage since a decade-long Hollywood construction boom that ran through the mid-1970s, when about 2 million square feet were developed, Folb said.

Entertainment, Technology

J.H. Snyder plans to begin construction of its $120 million property, which will have one four-story office building and another with five floors, later this year or in early 2013, and plans to complete it in 16 to 18 months, Dujovne said. The 244,000-square-foot complex is being built on a speculative basis, or without tenant commitments. The developer is seeking to capitalize on relatively low land costs and growing tenant demand for high-end offices.

“Here in Hollywood, we are willing to build on spec because we know of a significant amount of users who would be interested in a building like this,” Dujovne said. “They are primarily from the entertainment and tech industry. There is a lot of interest in being in Hollywood because of its name, but also it’s very centrally located.”

Construction is being driven by office landlords hoping to lure media companies, and by apartment developers targeting young professionals willing to shell out as much as $10,000 a month in rent, Gubler said.

‘Dirty, Unsafe’

Six projects -- including residential, office and retail developments, as well as a new West Coast campus for Boston- based Emerson College -- are under construction in Hollywood, about 7 miles (11 kilometers) northwest of downtown Los Angeles, and four more are scheduled to start within a year, according to Gubler.

Public investments costing about $120 million have been made in Hollywood over the past 20 years, including new street benches, landscaping and parking garages, Gubler said.

“Largely we have succeeded in changing the perception of crime and grime -- that Hollywood is dirty, unsafe and seedy,” he said.

While the projects under development are supported by the current level of demand, another significant slump in the economy may scuttle future construction, as happened in the aftermath of the financial crisis exacerbated by the 2008 collapse of Lehman Brothers Holdings Inc., Gubler said.

Little Space

“We had a lot of construction planned just before the bottom fell out of the market,” he said. “Another downturn could certainly impact all this activity we’re seeing now.”

Milk Studios, a New York-based photography studio, opened its Los Angeles location in Hollywood in late 2010. It completed an “extensive renovation” of a property built for film-making technology producer Technicolor SA (TCH), leaving little aside from exterior walls untouched, said Willie Maldonado, who heads the office.

Milk’s Los Angeles office, with 45 employees, has 45,000 square feet, high ceilings and a “lot of open spaces” -- all requirements for a photography studio, Maldonado said. When Milk decided to locate in Hollywood, there was little appropriate office space available in a part of town where the company decided it needed to be, he said.

‘Celebrity-Oriented’

“The advertising and print world has become so celebrity- oriented -- all the ad campaigns use celebrities instead of models, so we wanted to be closer to the talent,” he said. “Hollywood has changed a lot. The area has gotten a lot cleaner and nicer. They’ve talked about the revitalization of Hollywood for so long. It seems like finally it’s happened.”

Companies with offices in Hollywood include Time Warner Inc. (TWX)’s CNN network; Live Nation Entertainment Inc. (LYV), the world’s biggest concert promoter and ticket seller; TV Guide Network; media-research firm Nielsen Holdings NV (NLSN); and Technicolor, Gubler said.

Part of Hollywood’s attraction to developers is the value offered by land in the neighborhood. Constructing an office building across town in Santa Monica would cost more than twice as much as in Hollywood, according to Dujovne of J.H. Snyder.

“There’s hardly a month when there isn’t some company that comes in to my office and says we’re looking at Hollywood,” Los Angeles City Councilman Eric Garcetti, whose district includes most of Hollywood, said in a telephone interview.

Upscale Apartments

Leasing by media companies is helping buoy demand by people working in the industry for the neighborhood’s new, upscale apartment buildings, according to Penelope Psaltiras, a real estate broker with Prudential Beverly Hills.

“A lot of the leases I arranged in the last year have been for entertainment-industry people,” she said in a telephone interview. “I’ve helped anybody from celebrities to producers. Many of these people like to be close to the studios, and they like the ease of renting a place and not being committed to a mortgage.”

Buildings for which she finds renters have such amenities as pools, gyms and city views. The properties are in demand with tenants “used to a certain standard of living, even if that means paying $5,000 a month,” Psaltiras said.

Along La Brea Avenue, one of the area’s north-south arteries, cranes and orange construction fences line several large blocks. Monarch Group, a La Jolla, California-based developer, is building two high-end retail-and-residential buildings costing a total of $140 million on La Brea. The street divides Hollywood, part of the city of Los Angeles, and West Hollywood, a separate city.

Construction Return

One building is scheduled to open by the end of next year, and the other in April 2014, according to Steven Paull, Monarch’s chief financial officer.

Paull said development, which dropped off in 2007 with the start of the last U.S. recession, is picking up in Hollywood in much the same way that it’s returned in parts of Boston, San Francisco and New York.

“There’s pent-up demand in these areas,” Paull said. “Rents have moved up a bit and, finally, a bit of construction is starting to flow.”

Throughout the U.S., construction spending is expected to rise 4.4 percent this year and 6.2 percent next, led by industrial development and followed by hotel, retail and office construction, according to the semiannual American Institute of Architects survey, released earlier this month.

Trader Joe’s

In the Hollywood area, Monarch’s projects join such recently completed developments as 1600 Vine. The mixed-use property, which opened in February 2010, has studio apartments, one- and two-bedroom units, and two-story townhouses, as well as a Trader Joe’s supermarket and other stores.

CIM Group is planning a 22-story residential, retail and office development, which will also have a 21,000-square-foot public park, according to Karen Diehl, a spokeswoman for the Los Angeles-based company, who declined to provide financial details. The property, named Sunset Gordon for its cross streets, is scheduled for completion in the second quarter of 2014.

Kilroy Realty, also based in Los Angeles, last month completed the $79 million acquisition of a 330,000-square-foot office building, and is planning on “essentially gutting and redesigning” the property at a cost of as much as $19.8 million, according to Executive Vice President David Simon.

‘Doing OK’

“Hollywood is unique, in a sense, because much of the demand for new product is coming from the entertainment, technology and media industry, which is doing OK,” Simon said in a telephone interview.

The overhaul of the building, whose primary tenant is Nielsen, will help meet demand for “modern, creative and open office space,” which is scarce in Hollywood, Simon said. Only about a third of office space in the area is considered Class A, or top-tier, he said.

“In today’s economic climate, development has to be selective, but many markets have dynamic areas that are gentrifying and are poised to grab demand,” Simon said. Kilroy is planning to buy land to build additional office buildings in Hollywood, he said.

Los Angeles put the Hollywood Redevelopment Project in place in 1986 to encourage building in the district, which helped pave the way for a turnaround, said Garcetti, the area’s city councilman. Violent crime has dropped 66 percent in Hollywood in the past 11 years, partly because of an increase in the number of officers at the Los Angeles Police Department’s Hollywood station, he said.

Liquor Stores

There remains room for improvement, Garcetti said. Near Hollywood Boulevard and Highland Avenue, visitors sip cocktails in the lobby of the Loews Hollywood Hotel and check out the celebrity hand prints in front of Grauman’s. About a 10-minute walk east, the W Hollywood hotel sits adjacent to a part of town still dominated by run-down liquor and convenience stores. Homeless people occupy the front stoops of some buildings.

Starwood Hotels & Resorts Worldwide Inc. (HOT) operates the W on Hollywood Boulevard near Vine Street, which was developed by Gatehouse Capital Corp., a Dallas-based real estate investment firm, and opened in January 2010. The hotel, home to Drai’s Hollywood rooftop lounge and pool bar, is part of a $600 million retail-and-residential complex that sits atop a subway station.

“We have actually looked toward Times Square as a success story we could emulate,” Gubler said. “They aren’t exactly the same, but you’ve got Broadway and you’ve got Hollywood Boulevard, two of the biggest names in entertainment. So we thought, if they can do it, so can we.”

J.H. Snyder is looking for more development opportunities, either office or residential, in Hollywood. The company bid and lost out on a couple of projects, including the Sunset Gordon complex that CIM is building.

“So many big players are interested,” Dujovne said. “It’s getting harder and harder to win these good projects.”

To contact the reporter on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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