LA is the country’s latest techtopia. How is the office market adapting?

Top landlords and WeWork exec riff on the industry's impact at TRD forum

Mar.March 09, 2018 08:00 AM
From left: Hiten Samtani, Patrick McRoskey, Eric Brown, Jon Slavet and Ryan Smith

Technology tenants have transformed the Los Angeles office market, but are landlords putting too much stock in a single industry?

Not according to top brokers and landlords who gathered at The Real Deal’s Westside showcase Wednesday, for a discussion on how tech is changing the commercial real estate game. The panelists argued that “tech” had seeped into every business, and that L.A.’s office market is diversified enough that landlords aren’t overexposed to one industry. And though some startups might flame out, a real estate operator’s emphasis should be on building and maintaining the best product.

“We underwrite real estate, not tenants,” said Ryan Smith of Hackman Capital, which has landed the likes of Amazon and Apple at its projects in Culver City. He noted that in some cases, a tenant going under water might even work out in a landlord’s favor, for example if that tenant was paying rents below where the market is today.

On the sky-high valuations being seen nowadays in the tech industry, LBA Realty’s Eric Brown said they didn’t keep him up at night.

The panelists — Smith, Brown, WeWork’s Jon Slavet and CBRE’s Pat McRoskey — talked about some of the unique challenges of dealing with tech tenants, whose space needs tend to grow exponentially and who often demand that landlords move very quickly.

McRoskey talked about Oracle, which is a major tenant at the Water Garden building in Santa Monica. The firm quickly ballooned from an initial 35,000 square feet at the property to about 175,000 square feet, and the broker discussed how landlords need to recognize that growth pattern and be prepared to accommodate it, whether through tenant relocations or buyouts, or offering short-term flex space.

“With a tenant like that,” he said, “you’re going to figure it out.”

Slavet discussed WeWork’s ability to serve as a pinch-hitter for landlords who need to deal with a rapidly-growing tenant. WeWork’s co-working space could temporarily house some of the expanding company’s workers, he said, while the landlord is working things out.

Hiten Samtani, TRD’s digital editorial director and the moderator of the panel, asked the landlords if they saw WeWork as a competitor. The co-working space provider, most recently valued at $20 billion, has been ramping up its enterprise division, signing the likes of IBM and Amazon to full-building deals. Why take in WeWork as a tenant when it could one day woo away your corporate tenants?

Hackman’s Smith acknowledged that it was something his company thinks about. But net-net, having a credit-worthy tenant like WeWork take a big chunk of a building’s space in one swoop makes it a good bet, he said. Slavet pointed to his company’s ability to up a building’s sex appeal through design, amenities and culture.

“If you look at it as a zero-sum game, you would see us as competition,” Slavet said. “But it’s not a zero-sum game.”

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