Pandemic Deals, Accelerated Recovery Cement El Segundo As Office Hot Spot
When meat substitute company Beyond Meat signed a 12-year lease for 281K SF at Hackman Capital Partners’ 888 Douglas in January, it drew attention as the biggest LA-area deal since the beginning of the coronavirus pandemic. This month, L'Oréal USA signed on to open a second headquarters in over 100K SF at the same development.
El Segundo has emerged in the last few years as an office hot spot, resetting its long-standing reputation as an aerospace town and the home of a Chevron refinery. Its industrial history has helped its office market, as many of the most in-demand offices are former industrial buildings repurposed into creative office spaces.
In the Smoky Hollow district, the city has zoned to encourage these kinds of projects. Its proximity to the area sometimes called Silicon Beach has also helped boost its profile.
Though the pandemic seriously affected the office market everywhere, locally and nationally, brokers continue to have confidence in El Segundo as a blossoming hub for creative offices, and developers are forging ahead on new projects. There is over $1B of development under construction in development, according to city officials.
Although all of the South Bay did well in the first quarter of this year, El Segundo saw the most activity, with new leases totaling just under 365K SF, according to a Q1 2021 report from CBRE. Its average asking monthly rent, at $4.22 per SF, is the highest in the South Bay.
Last year, about 90% of the leasing activity was in creative, low-rise buildings, CBRE Executive Vice President Grafton Tanquary said. This year, those are still very desirable office types.
One of El Segundo’s big leases this year was Belkin International, which in March announced it was moving into 65K SF at Tishman Speyer’s 555 Aviation. The building's ample amenities, including outdoor work areas and parking, and its location in proximity to the 105 Freeway and the Metro C Line light rail made the property attractive to the company, Belkin Vice President of Global Communications Jen Wei Warren said.
But there has also been a renewed interest in the more traditional office buildings, like the ones clustered around Pacific Coast Highway north of El Segundo Boulevard, from companies in finance and healthcare.
"Landlords are being competitive economically in well-located, well-positioned, traditional floor plate-type assets that have high-quality space available,” and there are tenants that are interested, Tanquary said.
Still, it hasn’t all been rosy. In Q1, more tenants vacated space than occupied it, resulting in nearly 90K SF of negative net absorption in El Segundo and more than 340K SF of negative net absorption in the South Bay overall.
“Although the uptick in activity indicated improving optimism, the consistent downsizing and hesitance to commit to long-term leases illustrate that the market is still on the path to recovery,” CBRE’s Q1 report noted.
“We get a lot of phone calls from people saying, ‘I'm on two floors; I want to keep one floor and renegotiate early.’ Because some people are growing, some people are contracting,” Tanquary said.
But as offices are vacated and new tenants move in, so come new workers — usually well-paid ones working in the creative sectors that are attracted to El Segundo. These workers, if looking to live in El Segundo, may have a hard time finding housing they can afford.
The median home price in El Segundo has risen, as have others across the state and country. It sits at $1.34M, according to real estate listings site Redfin, a 21.8% increase over last year. El Segundo officials in the recent past have voiced hesitation to adding housing.
“From the city perspective right now, it doesn’t make any sense” to create more housing in El Segundo, then-City Manager Greg Carpenter said at a 2018 Bisnow event, adding, “I don’t think we’re ready for it.”
But housing is on the horizon. Mar Ventures and Continental Development Corp. have proposed new multifamily housing along Pacific Coast Highway that would replace parking lots serving the Fairfield Inn & Suites and Aloft hotel with over 260 apartments, including 26 affordable units. The state’s regional housing needs assessment, released last year, mandates that the city has to make it possible to add 492 units of housing at a variety of income levels.
With increased housing stock on the way, developers are looking at the city as a great location for more new office space.
Vella Group principal Zach Vella said his company, in partnership with London & Regional Properties Ltd., is moving forward with a project that will transform a property previously occupied by Boeing on Pacific Coast Highway into approximately 400K SF of Class-A creative office space.
The project reflects what the developer anticipates will be strong demand for office space with "cohesive, collaborative environments with a lot of outdoor space," Vella said. The project is working through the city planning approvals process.
Continental Development Senior Vice President of Real Estate Bob Tarnofsky said his company, which has been active in El Segundo for decades, is working on transforming a former manufacturing facility at 2201 Rosecrans Ave. into 80K SF of creative office space.
El Segundo has been successful in bridging the geographic gap that the Los Angeles International Airport creates between Westside hubs like Playa Vista and Santa Monica and itself. Now, creative tenants in tech, media and entertainment all see El Segundo as a viable location for their organizations and offices.
"We're seeing our base of potential tenancies expand,” Tarnofsky said.
CORRECTION, May 24, 5:30 P.M. PT: An earlier version of this story misstated what would be replaced by the Mar Ventures and Continental Development project. It would replace parking lots serving the hotels, but not the hotels themselves.