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The Real Deal Los Angeles

Silicon Beach keeps on scaling upward and outward

Rents soar in hot hoods, but expansion could prove to be a market equalizer

September 22, 2016 10:30AM
By Laurie L. Dove

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The Water’s Edge offi ce campus at 5510 Lincoln Boulevard in Playa Vista

The Water’s Edge offi ce campus at 5510 Lincoln Boulevard in Playa Vista

Updated, Thursday, October 6, 2016, 1:20 p.m.: From the L.A. print issue: In less than a decade, Silicon Beach has grown from a Silicon Valley outpost in Santa Monica to encompass a stretch of coastline as far south as Playa Vista and as far east as Culver City. Market pros are now closely watching whether the high-tech enclave will continue marching south to El Segundo, eating up real estate along the way.

Fully 86 percent of the nearly 700 tech firms in Los Angeles are located in Silicon Beach, according to CBRE. The roster includes such boldfaced names as Facebook, Google, Hulu and Snapchat, as well as high-tech incubators and startups — such as DogVacay and Scopely — which haven’t (yet) achieved household-name status.

But experts say this isn’t a replay of the dot-com bubble in the late 1990s, when startups rushed to get big in order to score an initial public offering while the market was red hot. These days, brokers say, young tech companies aren’t land-banking office space, as they did back then.

“You don’t see 50 employees taking 20,000 square feet,” said Jaclyn Ward, an associate at JLL’s Los Angeles office. “They’re being pretty conservative.”

This tendency, in turn, has kept the sublease market fairly tight and given landlords pricing power in the core market in Santa Monica. Sublease space is more plentiful on the periphery, in Playa Vista.

“The challenge in Silicon Beach is a pretty continual lack of space that pushes rental rates up,” said George Pino, the co-founder and CEO of Commercial Brokers International. However, he added, the continued expansion of Silicon Beach into new neighborhoods could become an equalizing force on market prices.

Here’s a look at some of the biggest deals and most notable tenants in the area’s key beachheads.

Santa Monica

In downtown Santa Monica, where tech firms vie fiercely for prime locations, vacancy rates hover in the single digits and asking rents have soared to $7 or $8 a square foot per month, up from an average of $4.61 just a few years ago, according to data from JLL. But in outlying areas, some big-name companies have pulled up stakes. Both Yahoo and The Honest Company have decamped for Playa Vista, leaving tens of thousands of square feet in their wake.

In the second quarter of 2016, Santa Monica overall had a 17 percent office vacancy rate and average asking rents of $5.40 a square foot, according to JLL. Ward said the “massive exodus” for Playa Vista in 2015 and early 2016 led to the higher vacancy rates, although some of that space has already been absorbed.

In early 2016, Oracle inked a deal to expand from 80,000 square feet to approximately 130,000 square feet in The Water Garden, located at 1620 26th Street. The building is currently being renovated to include collaborative work space in its lobby and an outdoor seating area with a fire pit, said Michael Nieman, a tenant representative at CBRE, and who represents the building.

In June, AwesomenessTV, a teen-targeted video-streaming company majority owned by DreamWorks Animation, closed on a 90,000-square-foot lease for its headquarters at Pen Factory, a Clarion Partners property at 2701 Olympic Boulevard.

Venice

Venice Beach has some of the highest asking rents in Silicon Beach, with prime space renting for upward of $8 a square foot. Google is a large tenant, with a 100,000-square-foot campus environment in three buildings, including the historic Binoculars Building designed by Frank Gehry. In front of the building is a giant binocular-shaped sculpture by Claes Oldenburg and Coosje van Bruggen.

A Hughes 269A helicopter in front of an aircraft hangar once owned by Howard Hughes and now a home for YouTube in Playa Vista.

A Hughes 269A helicopter in front of an aircraft hangar once owned by Howard Hughes and now a home for YouTube in Playa Vista.

Snapchat is another key tech player in the area. In 2015, the company doubled the size of its Venice Beach lease at the intersection of Venice and Abbot Kinney boulevards to 40,000 square feet. In 2016, it leased 80,000 square feet in city-owned structures at the Santa Monica Airport, including two buildings and eight hangars. Snapchat has agreed to make $1.4 million in improvements to the buildings for a rent credit of five months.

“Snapchat is always a hot topic,” Ward said. Founded in a beachfront bungalow on Ocean Front Walk in Venice Beach in 2011, the company later moved into roomier quarters at 63 Market Street, also in Venice Beach. It continued to expand by inking more leases around Venice Boulevard.

Playa Vista

Playa Vista certainly isn’t playing Kmart to Santa Monica’s Target, but many market pros do see it as a veritable bargain. With average asking rents below $5 a square foot and a wealth of new creative space, Playa Vista — just minutes south of Santa Monica — has attracted new and established tech companies alike. At least 80 percent of Playa Vista’s commercial space is occupied by technology, entertainment and media companies, including many industry heavyweights, such as Facebook, Microsoft, YouTube, IMAX and Sony Playstation.

The Silicon Beach stronghold has even been immortalized on TV. Scenes for ABC’s “Revenge” were filmed at the Water’s Edge office complex, located at 5510 Lincoln Boulevard, which includes a reflection pool and recreation areas. Electronic Arts leases nearly 150,000 square feet in two buildings, and sublets space for filming at Water’s Edge.

In 2014, Google spent $120 million to buy 12 acres next to Howard Hughes’ famed “Spruce Goose” airplane hangar, which is zoned for nearly 900,000 square feet of commercial space. Then, in 2016, the company acquired a long-term lease for the hangar as well.

YouTube, a Google subsidiary, has occupied space next door since 2012, when it became one of the first tenants in the newly opened Hercules office campus, which also occupies land formerly owned by the Hughes Aircraft Company. Dubbed “YouTube Space LA,” it’s a spot where YouTube video creators — either employees or people from outside the company — can collaborate. 

In April 2016, Facebook scooped up a long-term lease to a three-story, 55,000-square-foot building being developed by Vantage Property at the east end of the Playa Jefferson office campus. The project is slated for completion in late 2017, and Facebook will occupy 35,000 square feet of the building, said Jonathan Larsen, a principal and managing director of Avison Young in Los Angeles.

In the summer of 2016, Yahoo was also preparing to move from space it has long occupied in Santa Monica, into a 130,000-square-foot space in the new
Collective campus on Playa Vista’s West Bluff Creek Drive.

The Honest Company, an organic personal-care products retailer founded by actress Jessica Alba, moved its headquarters here in 2016, taking an 83,000-square-foot spread across the top three floors of the i|o building, which is located at 12130 Millennium Drive. The fast-growing startup had revenue growth of more than $150 million in 2014 — the most recent year for which the private company has released data.

Culver City and El Segundo

Unlike other areas in Silicon Beach, Culver City’s asking rents are holding the line. The average rate for Class A office space remained flat, at $3.33 a square foot, during the first half of 2016. This makes rents here substantially lower than in other areas of Silicon Beach, where year-over-year increases of 50 to 75 percent are not uncommon.

Culver City has around 800,000 square feet of vacant office space, according to JLL. But brokers say that soaring prices in popular coastal neighborhoods such as Venice Beach have spurred bargain hunting here that might absorb some of the inventory.

WeWork, which operates co-working office space in markets from Los Angeles to New York, signed a long-term lease for 75,400 square feet at 5782 Jefferson Boulevard in Culver City in April 2016. The company plans to move in by late 2016, despite slashing its profit forecast by nearly 80 percent in July.

Farther to the south, El Segundo is being eyed as the next expansion area for Silicon Beach. The neighborhood already has multi-family buildings and office space, albeit much of it is in need of renovation.

“In Silicon Beach, some companies start with one person and some start with five, but they exponentially grow and add space,” Larsen said. “The next Honest Company is out there, growing, below the radar.” 

Correction: An earlier version of this article incorrectly cited Michael Niemen as an attorney and a building representative. He is a tenant representative. 

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