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The Real Deal Los Angeles

In El Segundo, transforming a city means reshaping its real estate

The industrial and aerospace town is carving out a niche as a lower-cost alternative for corporate relocations, including media firms
By Natalie Hoberman | June 22, 2018 01:53PM

(Credit: Max Pixel, Pexels)

For House of Moves, a motion capture production studio that records audio, background noise can become a nightmare situation. So when a household stone supplier moved in next door two years ago, CEO Brian Rousch decided it was time for House of Moves to find a new home.

Rather than relocate elsewhere within Playa Vista, a neighborhood at the epicenter of Silicon Beach where the company had been for a decade, Rousch chose a different track.

He turned to El Segundo, the 100-year-old industrial town just to the south.

Rousch liked El Segundo’s “cool, sort of beachy sleepy town feel,” he said. “It had everything we needed,” he added, including “eclectic places” to take clients like Blue Butterfly Coffee, named after the endangered El Segundo butterfly.

But the real draws were the city’s 40 percent corporate tax break and commercial rents that are 30 percent lower than neighboring cities. They allowed the animation studio to remain competitive amid rising rents and operating costs that have priced many firms out of places like Silicon Beach, the collection of Westside cities stretching from Playa del Rey to Santa Monica that are attracting Silicon Valley tech companies like Facebook and Google.

El Segundo is carving out a niche as a lower-cost alternative for corporate relocations. Its bid to transform itself from a hub for aviation and petroleum-based industries to a home for tech and entertainment startups illustrates how the diversification of the L.A. economy is starting to reshape its real estate.

“I think the major shift in the last five years has been that the area is now an acceptable location alternative for the big entertainment, media, and tech firms, that before would only locate in West L.A.,” said Bob Tarnofsky, an executive at El Segundo-based Continental Development, one of city’s largest commercial development firms.

But El Segundo, in pursuing its commercial strategy, is facing a housing shortage due to a lack of zoning, and tensions are high among residents who disagree on the direction of development in the city of 16,500 people. Only 20 percent of the city is zoned for residential development, and there are just 7,400 housing units within its borders.

The city said it is exploring using a $650,000 Metro grant to study redevelopment, reviving a debate stalled for a year. Officials are exploring the option of building high-density affordable or low-income housing in the east part of town. Many residents oppose building east of Sepulveda Boulevard, where most of the industrial and commercial buildings are located.

“We are a job center for the region and those jobs are supported by the commercial land that we have,” said Carpenter. “It’s not a simple decision.”

Since its founding in 1917, El Segundo has been closely associated with the Chevron refinery that hangs over the Pacific Ocean and occupies a quarter of the 5.5-square-mile city. It earned its name, which means “the second” in Spanish, after it became the site of Standard Oil’s second refinery on the West Coast; Chevron later grew out of Standard Oil. Aerospace companies followed, including Boeing, Raytheon and Lockheed Martin.

But in recent years El Segundo has attracted a new breed of corporate relocations, including a slew of media companies.

The city will soon be the new home of the Los Angeles Times, recently purchased by billionaire Patrick Soon-Shiong, chairman of El Segundo-based NantWorks.

The Times will occupy a 120,000-square-foot building on busy Imperial Highway, located across from Los Angeles International Airport, where Boeing Company and AT&T have their headquarters. Soon-Shiong said he decided to relocate the publication from its longtime Downtown building when the new landlord raised the monthly rent by $1 million. The Times will move into one of 11 buildings Soon-Shiong owns in El Segundo.

Gravitas Ventures, an indie film distribution company, recently committed to another five years in the city as it relocated to its third office within El Segundo, at 300 Continental Boulevard.

“Hopefully the city keeps the pro-small business taxes in place so we can stay even longer,” said Nolan Gallagher, Gravitas’ founder and chief executive.

The recent economic diversification has also attracted a flurry of developers to the area, such as Hackman Capital Partners, and co-working companies like Cross Campus and WeWork, which want to take advantage of the startup culture that’s brewing.

Hackman is redeveloping four industrial buildings spanning 30 acres, purchased from defense giant Northrop Grumman. The historic aerospace plant will become offices in a $100 million makeover, the company announced in August.

Aside from pedestrian-friendly streets, El Segundo’s growth has leaned heavily on its tax credit program to lure businesses. The 40 percent credit, based on sales tax generated in one year, means that companies with 100 employees and 15,000 square feet of office space pay about $14,240 in annual tax for the first $15 million in receipts. By comparison, companies in the city of L.A. and Santa Monica pay $67,500 and $75,000 a year, respectively, according to an economic report published by the El Segundo city government.

The credit, first put in place in 1996, can be used to offset up to 100 percent of the business license tax liability in the year after being reported.

Companies can also save big on rent. Weighted average asking rent for Class A office space is less than $3.34 per square foot. In Santa Monica and Beverly Hills, rents are over $5.30 a square foot, according to a first quarter 2018 report from Colliers International.

El Segundo also has more mid-and high-rise buildings than many of its South Bay counterparts, where density restrictions have limited large office towers, said Owen Fileti, an LA Realty Partners leasing broker who worked on Gravitas’ relocation.

Bob Healey, a CBRE broker, attributes the city’s affordability to its abundance of inventory. “We’ve been able to offer a supply of buildings which the other cities can’t,” he said.

Much of the supply is a carry-over from the late 1980s, when the Cold War was coming to an end. A slowdown in demand for aerospace technology left a ready supply of office and industrial inventory, which drew manufacturing giants like Mattel Toys to the area.

To encourage more adaptive re-use, the city launched an initiative in April to improve transportation infrastructure and upgrade office zoning in the Smoky Hollow District, a 120-acre stretch between the Pacific Coast Highway and Downtown El Segundo. City officials said their plan for the district will convert 330,600 square feet of industrially zoned space to a projected 1.2 million square feet of office space by 2040.

The new plan will also allow for light manufacturing in the district, which is expected to help retain and draw startups interested in making prototypes in-house. It’s also attractive to many firms that need flexible space, such as post-production or biotech startups, Healey said.

But El Segundo still faces challenges. Business leaders warn that the low commercial rents cannot continue forever.

Tarnofsky said he’s already seen upward pressure on rents. But it will likely take a few years for companies to absorb all the recent space that’s been created. Once that happens, “we’ll see another run-up in rents,” he said.

And while the municipal tax credit is “great at attracting firms to the city,” Tarnofsky doesn’t think the savings alone will keep them there. “It’s all about where the executive lives, what the employee base is and the ability to attract and keep employees,” he said.

For House of Moves, it was the neighborhood that sealed the deal.

After a year of hunting, the studio moved in 2016 to a 27,000-square-foot warehouse on 750 Lairport Street, signing a $5 million, 10-year lease.

Aside from wanting to avoid the noisy stone supplier, the company bristled at new zoning laws in Playa Vista that had transformed office space into a school, flocked with even noisier children.

“It just kind of felt like everything was getting mashed together, and the area wasn’t really built for it,” Brian Rousch said of his former neighborhood. In El Segundo, “it’s all professionals in the area.”