5 City Departments To Move To Coworking After Gas Company Tower Lease Falls Apart
After a would-be lease at one of downtown Los Angeles' financially troubled office towers fell apart, the city of LA will seek alternative office lodgings for some 1,200 employees in a coworking space.
The city's general services department received permission from the municipal facilities committee to lease space at Industrious at 444 South Flower St., taking 300 desks for one year.
Workers from the Housing Department, Office of Finance, Economic Workforce Development Department, Community Investment For Families Department and Youth Development Department need to be out of their current space at the Garland Building at 1200 West Seventh St. by Feb. 29, 2024.
No lease has been signed, but the GSD was permitted to lease space at Industrious in late November.
The expiration of the lease at the Garland Building was at one time expected to become a windfall for the Gas Company Tower, which Brookfield abandoned to lenders earlier this year.
The city was in negotiations for about 300K SF at the property, now in receivership, but talks fell through after the CBMS bondholders for the tower rejected the city’s terms and proposed new ones the city found unattractive.
City workers occupy approximately 229K SF at the Garland Building.
The 300 seats across two floors the departments plan to use will be occupied on a rotating basis aligning with the city's remote work policies. Of the 300, 275 will be on a floor with exclusive city access, the GSD said in its report, but 25 are located in common areas accessible by other Industrious tenants.
The GSD surveyed all the affected departments about this temporary arrangement and found that “departments are open to a staggered telecommute schedule and desk sharing for their staff during this interim period.”
The city’s decision to opt for a coworking space makes sense on several levels, especially given the time crunch it has to move its workers, Newmark Senior Managing Director Jennifer Frisk said.
“It’s probably virtually impossible to move that many people into direct or sublease space in the timeframe that the city has,” Frisk said.
The city might also be in a better negotiating position as time goes by and future Downtown office distress works its way out, resetting values for more buildings and potentially allowing the city to get a better deal in the future.
The 300 seats were offered to the city at $550 each, on the low end of the $550 to $900 per desk range that the city’s market analysis found. But the city will have minimal space for files, furniture and other items and will need to store them in the interim, the GSD said.
The city would lease this space for 12 months and would be able to move in 35 days after signing the lease. The General Services Department noted “the City’s project management team estimates a 10-to-12-month schedule to complete the permanent leased location,” but does not indicate whether that location has been found yet.
Presentations from potential landlords were presented to the committee in late October, but those presentations and any subsequent discussions occur in closed session and are not summarized in committee minutes.
All told the city estimates that one year at Industrious will cost it about $1.2M, less than the $1.9M it had allotted for real estate costs for the departments for a year.
The city is in a pinch to find space because it spent months working as though it was going to move into approximately 300K SF in the Gas Company Tower, only to have control shift when the tower's financial situation changed.
The city was ready to make a deal with the receiver and had submitted terms but, “[d]ue to continued deterioration of the market, on July 10, 2023, a significant appraisal reduction occurred, resulting in a change in the controlling class of bondholders for the property who subsequently proposed materially restructured lease terms for the City in early September prior to lease execution,” the GSD said in its November report.
Although the Gas Company tower needs tenants, elements of the city’s lease terms were unpalatable to bondholders calling the shots.
The city asked for a tenant allowance of $210 per usable square foot, city documents show. That works out to $178 per rentable SF, notes Cushman & Wakefield Executive Director Suzanne Lee, who was not involved in the negotiations but has seen the city’s lease terms for the deal, which are publicly available.
The city’s terms with the Gas Company tower also included no free rent on a 15-year lease. Those elements, together with the TIs the city requested, are in line with the market for Class-A offices in Downtown LA, Lee told Bisnow in an email. But, she said all those factors need to be weighed against the rent the tenant is paying.
At the Gas Company Tower, “The City negotiated a low absolute gross rate that covers all property taxes, operating expenses, as well as subsequent increases," Lee wrote. “That’s great for the City, but a higher risk for an owner. It’s likely Year 10 of the lease before the deal costs are recovered. For some landlords, that still makes sense in order to land a long-term credit tenant. For others, particularly on assets in receivership, maybe not, as those costs are unlikely to be recovered in an eventual disposition.”