Oct. 16 (Bloomberg) -- Josh Payne spent seven years in San Francisco, where a technology boom has pushed office rents to the highest level in a decade. He headed south to Los Angeles’s Venice area when starting his Internet firm, StackSocial Inc.
Payne and his 10 employees moved in August into a Frank Gehry-designed loft with three-story-high windows that overlook the Pacific Ocean and the boardwalk’s parade of characters, such as the roller-skating electric-guitar player Harry Perry. StackSocial cut its costs by sharing the 3,000-square-foot (280-square-meter) space and its $9,000-a-month rent with another startup, Lettuce LLC, which produces order-management software.
“There’s no way that we would have landed this type of location for this money in San Francisco and the Bay area,” said Payne, founder and chief executive officer of StackSocial, a one-year-old company that operates an online marketplace for software and gadgets. “It is difficult to get really cool, creative office space companies like ours are looking for at prices that are affordable.”
Office space is getting more expensive in Venice, part of a 3-mile (5-kilometer) stretch of oceanfront communities known as Silicon Beach because of its popularity with technology companies. Rents are climbing faster than in the wider Los Angeles region as startups pour into the area and compete for a tightening supply of real estate. The surge in demand is attracting developers, who are renovating old and abandoned buildings in hopes of appealing to more and larger companies.
In the market that includes Silicon Beach, the vacancy rate for office buildings 5,000 square feet or larger was 12.9 percent in the second quarter, down from a post-recession high of 13.6 percent at the end of 2010, according to brokerage Jones Lang LaSalle Inc. The average monthly asking rent during that period rose 6.4 percent to $3.32 a square foot in the area, which encompasses Venice, Culver City, the Olympic Corridor, Marina del Rey, Santa Monica and parts of West Los Angeles.
For all of Los Angeles County, the second-quarter vacancy rate was 20 percent, the highest in Jones Lang records dating to 1996. Rents climbed 2.1 percent from the end of 2010 to $2.47 a square foot. Office buildings in Silicon Beach often range from one to four stories, while other Los Angeles business centers, such as downtown and Century City, are dominated by high-rises averaging about 25 floors.
“Whether it’s Silicon Alley in New York, Silicon Hills in Austin, Silicon Beach in L.A. or Silicon Valley in the Bay area, it’s the tech sector that’s driving office demand,” said John Sikaitis, a Washington-based senior vice president at Jones Lang. “In most of these areas, the office market is completely robust and often far ahead of the rest of the recovery of the larger region.”
While Silicon Beach is much smaller than technology communities in Silicon Valley and San Francisco, the area is home to a rising number of Los Angeles’s more than 600 tech startups, according to a map by Represent LA, a website that promotes the companies.
StackSocial, which raised $800,000 from March to May from venture capitalists including Tim Draper and Paige Craig, competed with at least a half-dozen other small companies for its space, said Payne, 32.
Zambezi, an advertising agency that developed campaigns for such companies as Coca-Cola Co. and Comcast Corp., chose Venice because of its concentration of startups, access to entertainment-industry collaborators and the outdoor lifestyle, said Chris Raih, a co-founder of the six-year-old company.
“We oftentimes run, literally and figuratively, into other talented people” in the neighborhood’s hip stores and coffee shops, said Raih, 35. “That’s inspiring and a great chance to consult, formally or informally. And the beach is an inspiration. We have many employees who surf in the morning.”
Zambezi’s 50 employees moved a year ago from smaller offices a few blocks away to an 11,000-square-foot space near Abbot Kinney Boulevard, one of the district’s main commercial streets. The property includes decks and patios, showers and a garage that’s used to store bikes, surfboards and other sports equipment.
While Raih declined to disclose what the company pays in rent, he said it was “easily” 20 percent more than what a similar space would cost farther inland.
“We are willing to pay a premium to be in this area,” he said.
It’s not just small companies that are setting up shop in Silicon Beach. Google Inc., operator of the largest Internet search engine, opened its first office in the area 11 months ago. The company, based in Silicon Valley’s Mountain View, took 100,000 square feet near Rose Avenue in Venice in the Gehry-designed property known as the Binoculars Building, after the massive sculpture that functions as its entrance.
The beach area’s success while greater Los Angeles languishes is a reflection of the spotty commercial real estate recovery across the U.S., which is regional and often industry-driven, according to Jones Lang’s Sikaitis.
Silicon Valley, home to such large technology tenants as Facebook Inc. and Yahoo! Inc., has seen the office vacancy rate drop to about 19 percent in the second quarter from 24 percent in the last three months of 2010, Jones Lang data show. Monthly rents climbed 3.7 percent to an average of $2.68 a square foot during the period.
In San Francisco, rents have surged to the highest since the first quarter of 2001, near the height of the dot-com boom. Office rents averaged $4.06 a square foot in the second quarter, up 35 percent from the end of 2010, according to Jones Lang.
New York, where financial companies have cut jobs, fell to second behind technology-heavy San Francisco for the tightest U.S. office market in the third quarter, according to an Oct. 2 report by brokerage Cushman & Wakefield Inc. It was the first time since 2000 that Manhattan had a larger share of empty office space than the California city, which had a vacancy rate of 9.1 percent at the end of September.
The tightest area in New York is midtown south, also known as Silicon Alley because of its concentration of technology companies. Its vacancy rate was 6.6 percent in the third quarter, according to Cushman.
In Los Angeles, the influx of “30- and 40-something-year-olds with money” working at the many startups has also buoyed retail properties near the beach, said Suzy Frank, founder of Venice-based Abbot Kinney Real Estate. In the past two years, retail rents on Abbot Kinney Boulevard have more than tripled to $10 a square foot, she said.
“Vacancies for anything, retail or office, in this area are at an all-time low,” said Frank, who has lived and worked in the region for 25 years. “There’s a waiting list for anything becoming available.”
At least six developers are planning office projects in Silicon Beach, seeking to capitalize on the surge in demand, according to Jones Lang. Some are working to revamp former factories, post offices and run-down landmarks to appeal to larger technology companies that they hope will continue to migrate to the area, according to Carl Muhlstein, a Los Angeles-based managing director at the brokerage.
Construction of new buildings has been scarce, in part because of the area’s lengthy permit-approval process, which requires developers to report the potential environmental impact of their projects, Muhlstein said. More offices may be built because renovation possibilities are starting to run low, he said.
“There are very few offices left to repurpose,” he said. “That’s going to force new edgy construction. Not your father’s Oldsmobile-type office.”
Worthe Real Estate Group, based in Santa Monica, and San Francisco-based Shorenstein Properties LLC teamed to renovate a 380,000-square-foot former mail-distribution center on almost 20 acres (8 hectares) in the Los Angeles neighborhood of Playa Vista, where Internet and media companies such as Digital Domain Media Group Inc., YouTube Inc. and FoxSports.com have offices, according to Jones Lang LaSalle.
Time Warner Inc.’s TMZ division agreed in August to be the first tenant in the development, called the Reserve. The celebrity-gossip website took 34,000 square feet, according to Hayley English Blockley, a senior vice president at Jones Lang LaSalle, the leasing agent.
Rents, not including utilities and other expenses, start at $2.75 a square foot in the building, which will open Dec. 31, according to English Blockley. An average of two potential tenants a week have toured the property, about twice that at similar projects outside Silicon Beach, she said.
“It’s a submarket in transition that is becoming more and more attractive,” said Charlie Malet, chief investment officer at Shorenstein. “Demand is not evenly spread across L.A. County -- or for that matter, across the U.S. For that reason, developers today are very targeted as to where they get active.”
Other developers working in the area include Los Angeles-based Ratkovich Co., which renovated 10 buildings totaling about 453,000 square feet in Playa Vista. Tenants in the project -- called Spruce Goose after Howard Hughes’s legendary plane, which was built at the site -- include marketing agencies 72andSunny and Earthbound Media Group, according to Jones Lang.
A sustained recovery in Silicon Beach may be at risk if the small startups that are fueling the area’s growth struggle to stay alive, said Steven Heller, an attorney at Santa Monica-based Gilchrist & Rutter Professional Corp. The law firm has brokered several leases in the area for companies including Ascent Media Group, Beats Electronics LLC and TrueCar Inc.
“Silicon Valley grew under the power of a handful of huge companies -- Apple, Google, Facebook, etc.,” Heller said. “There is no Goliath here, only embryonic companies with promise and excitement. None are ‘huge’ yet and may never be.”
There’s also potential for an “opposite problem: too much success,” he said. “If this submarket continues to have success luring tenants, then naturally, rents will continue to go up. Young startup companies are not in the position to pay premium rents, so they will naturally seek cheaper rents elsewhere.”
Amplify, a so-called startup accelerator based in Venice, offers young companies a way to reduce the cost of office space near the beach. About 30 members are renting space in Amplify’s headquarters for monthly fees starting at $520 for a work station and $1,320 for an office. In addition, six startups are participating in a program in which Amplify contributes about $50,000 in seed money in exchange for an 8 percent equity stake, according to Jeff Solomon, a partner at the company.
Amplify pays $3 a square foot for its building, covered with graffiti art and once home to a “hodgepodge” of tenants including a bong shop and video store, said Solomon, 38.
A few blocks away, StackSocial, which got its start with funding from Amplify, relishes its hip and perpetually sunny spot on the oceanfront. Payne said he’s glad his company is in Venice instead of Northern California.
“When my San Francisco friends saw I was moving from the Bay area to L.A., they were questioning what I was doing,” Payne said. “I love both areas, but it’s great for us being here. And let’s face it, Silicon Beach weather is a huge plus.”
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