Riding the Tech Wave on Silicon Beach

Savills Studley Insights
November 12, 2013
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A rising appetite for creative space among tenants is a bright spot in an otherwise lackluster Los Angeles office market. Startups and established companies in new media, technology, and entertainment are demonstrating an appetite for a specific type of non-traditional office space in particular areas of the Westside. Spaces that are open, transparent, efficient, and easily adaptable are in the greatest demand. Specifically, this is having a real and dramatic impact on rents and availability in Santa Monica and “Lower Westside” submarkets such as Playa Vista, Marina del Rey, and Culver City.

Firms who employ highly skilled creative professionals to generate original software, hardware, and content are providing a boost to many metro economies nationwide. In certain tech-related fields, Los Angeles has already established a dominant presence. According to 2013 figures from the Bureau of Labor Statistics, Greater Los Angeles has a higher number of “internet publishing and web search portal” companies than other tech-centric regions such as San Francisco, Washington, D.C., and Boston.

Creative Space by Approximate Rentable Building Area

Both large companies and smaller startups share preferences for the location and layout of their physical operations. Proximity to amenities and residences geared toward a younger urban-centric audience has jumpstarted unconventional office submarkets like SoMa in San Francisco and Midtown South in New York. In Southern California, the appealing lifestyle elements and unique building inventory has led submarkets such as Santa Monica, Playa Vista, Marina del Rey, and Culver City to evolve into a similar creative hub.

Recruitment and retention of top talent is a priority for these companies. Tenants seek spaces that support their brand and foster innovation and space is being leveraged to encourage a free flow of information and ideas while promoting a more collaborative and egalitarian company structure. As such, the location and layout of space are key factors for companies seeking creative space, not only in terms of attracting new employees but also in retaining their existing workforce.

The “LA take” on tech represents a combination of media, entertainment, and design. New firms, and branch divisions of larger companies, are establishing or expanding their presence in Los Angeles to draw on the experienced entertainment talent pool. In the past year, several prominent creative companies have signed leases in the Lower Westside. Beats by Dr. Dre, a musical electronics company, recently leased 110,000sf in two converted Culver City warehouses. The company moved from a traditional corporate venue to this space, built in the 1940s, in order to provide a more vibrant and open environment for its employees.

Lower Westside and Santa Monica Creative Office Space

Other similar transactions include Sony Playstation’s 92,000sf lease at The Reserve and Microsoft’s 25,000sf transaction (both in Playa Vista). Google has recently signed leases at 340 Main St in Venice for 100,000sf and at 300 Rose Ave for an additional 67,000sf, while Amazon continues to grow its online entertainment production division in Santa Monica. On top of these, Riot Games is in discussions for a potential 300,000sf lease at the Element LA project.

Beyond these recent high-profile lease signings, there are several other tenants searching for large blocks of creative space in an increasingly tight market. Yahoo!, Demand Media, Deluxe Digital Entertainment, and Digital Domain 3.0 are rumored to be scouring the Lower Westside for new space. The total requirement for these four tenants is estimated to be nearly a half million square feet.

As a result of this activity, creative office market fundamentals in the Lower Westside and Santa Monica are rapidly strengthening. Studley estimates that out of 25.0msf of total office space in this area, 5.4msf is creative space (see map above). Assuming the aforementioned tenants seeking new space ultimately occupy creative offices, the vacancy rate for this type of space would fall from 12.5% to only 3.3%. Thus, supply constraints are a real concern.

  • The vacancy rate for creative space in Santa Monica and the Lower Westside decreased 4.9% in the last 12 months (Q3 2012 – Q3 2013) while the non-creative vacancy rate in the same area dropped less than 1.0%. In West LA overall, the vacancy rate declined 1.1%.
  • Creative space demand in Santa Monica/Lower Westside has buoyed net absorption, a demand proxy, in the overall West LA market. Creative space comprises only 9.5% of the total office space in West LA (out of a total of 49.0msf).
  • Net absorption is up 342% annually for Santa Monica/Lower Westside creative space since Q3 2012. Year-to-date, net absorption has been positive—at 378,000sf. During the same period, non-creative space net absorption declined 70%.
  • Asking rental rates for creative space commands an average premium of more than 13% over traditional space in the area. This is notable considering that much of the creative space is in older buildings with fewer modern amenities than traditional office space.
  • Rental rates for creative space have increased year over year by 16.5% - compared to a 2.9% increase in West LA overall and a 2.3% rise for non-creative space in the Lower Westside.
Annual Change in Key Market Metrics

This dramatic increase in demand for creative space is driving up rents and lowering availability. Tenants are willing to pay a premium for space that was previously overlooked, strengthening the fundamentals of the Westside office market overall. To date this is a clustered phenomenon, and, with the exception of some areas of Downtown LA, has shown little evidence of spreading throughout the LA Basin, therefore providing minimal relief to the region’s stalled office market.

Looking ahead, we see sustained demand from occupiers of creative space as they continue to relocate and expand. Absent a large-scale correction in the technology sector, this will add upward pressure on rents and further decrease the available supply of creative space. Build-to-suit development may become more prevalent along with further conversion of industrial space, especially in submarkets with a greater supply of underutilized product, such as Culver City.