NY Times, March 8, 2006
What's Missing From Hollywood? Office Space
By MORRIS NEWMAN
LOS ANGELES, March 7 — An unremarkable office building in Hollywood from the 1970's might seem an unlikely candidate for a Cinderella story. With an aging exterior of black glass and a billboard on the roof, the building, 1800 Highland, was nearly empty until recently. Its few tenants paid rent month to month. This month, however, the CIM Group of Los Angeles, the largest private landlord in Hollywood, plans to give the humble 80,000-square-foot building the star treatment. Driven by the demand for scarce office space in this reviving district, CIM plans to pull down the rooftop billboard and replace the tired exterior with a sleek new glass skin.
For years, 1800 Highland Avenue "sat there with signs on it in a relatively run-down condition," said Steven Tronson, vice president of Ramsey-Schilling Real Estate Services, a local real estate brokerage firm, "and now it's being repositioned as a Class A office building." Even with the building draped in construction cloth as work begins, CIM says it has received "substantial interest" from entertainment-related companies looking for space in the building, which it bought in 2004 for $14 million. No new office buildings have been built in Hollywood since the mid-1970's, and until recently there has been little demand from large-scale entertainment tenants, who typically looked for space in Santa Monica, Beverly Hills or Burbank.
The planned rebirth of 1800 Highland Avenue is also part of a larger attempt by CIM to manage its office properties — it also owns residential buildings and retail space in the area — following a districtwide strategy in which it will try to achieve a balance among the different segments of the market that it owns. "Hollywood Boulevard is a multiheaded beast," said John Given, the CIM principal in charge of investment and development. "There are layers of different uses and user groups on the boulevard and that gives Hollywood Boulevard a 24-7 context."
"We understand that Hollywood is many lifestyles, many cultures and many different demographics," he added, "and that makes it possible for us to acquire buildings in a variety of locations."
The company is trying to respond to the real estate market by noting the changes from block to block within a two-mile stretch of Hollywood Boulevard. That stretch includes familiar tourist attractions like Grauman's Chinese Theater, as well as the bulk of the district's office buildings. National chains like Virgin Records may need a big, splashy location to appeal to both tourists and local residents. Chic new restaurants like Geisha House, and specialty shops like American Apparel, on the other hand, tend to thrive in older low-rise buildings in slightly less-trafficked areas, where they are within walking distance of the growing number of people in their 20's and 30's either living and working in Hollywood, or both. Production companies and other entertainment-related businesses, meanwhile, are trawling the market, often for large-scale office space, but finding little.
CIM's approach is "quite visionary," said Helmi Hisserich, the Hollywood regional administrator for the Los Angeles Community Redevelopment Agency, which has jurisdiction over much of Hollywood Boulevard. The firm, she adds, "really views Hollywood as an entire district."
"They are not tackling it one building at a time, but one big market segment at a time," she said.
CIM was founded in 1994 by two Israeli-born developers — Shaul Kuba and Avi Shemesh — with Richard Ressler, a financial professional and former employee of Drexel Burnham Lambert, the investment banking firm. The company enjoyed its first big success in Santa Monica, on the Third Street Promenade, a three-block shopping street in a redevelopment area of that oceanfront city, where CIM became the largest single landlord. The Promenade was a mixed-use district, and CIM learned to respond to the market with the type of development that seemed warranted — housing, shops or office space — in new and existing buildings.
In Hollywood, CIM benefited from good timing and perhaps a bit of luck. Drawing on a fund underwritten by two of the nation's largest public pension funds, the California Public Employees Retirement System and the California State Teachers Retirement System, the company bought its first Hollywood building in 1997, well before the current vogue for the district gathered steam. Formerly shunned by Los Angeles residents, Hollywood Boulevard had a reputation as a mean street where teenage runaways, drug dealers and would-be rock stars wandered in a landscape of tacky souvenir shops. It was easy to dismiss the boulevard as the dark side of the entertainment industry.
With an inventory of 10 commercial and residential buildings in Hollywood and an 11th in escrow, CIM is "the most enthusiastic investor to come into this area in the last 10 years," Mr. Tronson said.
In February 2004, CIM undertook its largest and perhaps biggest challenge in Hollywood, by buying the 640,000-square-foot Hollywood and Highland complex for $201 million. The developer and seller, Trizec-Hahn of Toronto, took a reported $360 million write-down on the project. The building had opened in 2001 to hostile reviews and lukewarm sales. Many local residents disliked the complex — a 640-room hotel, retail space, a multiplex cinema and the Kodak Theater, home to the Oscar ceremonies — that seemed to some an overscaled intrusion of corporate America, with national chain stores dominating the tenant mix.
CIM's approach has been to find tenants more in tune with the young consumers Mr. Given identified as one of several pivotal customer groups in Hollywood. Earlier this year, a Virgin Megastore moved into the building. Another new tenant is Lucky Brand Dungarees, while the landlord is in negotiations with Damon Wayans and Keenen Ivory Wayans to open a comedy club in the complex. "You come to Hollywood and hope for something special and they deliver on that," Ms. Hisserich said.
CIM has also been one of many developers to capitalize on the Hollywood housing craze, converting two former office buildings into 101 rental apartments. Other developers have been building or converting office buildings into condominiums, which are getting up to $800 a square foot. The runaway housing market, in fact, has caused concern among Hollywood watchers, who say Hollywood needs more office space to remain a viable business center. Housing, however, is typically more profitable than office space, and that difference in real estate values threatens to displace office development, Ms. Hisserich said.
"There's a lot of pressure from the housing market, and we are somewhat concerned that the big commercial parcels are being snapped up for housing," she said.
The redevelopment agency, in fact, is prepared to "fast track" the normally time-consuming process of obtaining government approvals for any developer who can put together the land for a project. The CIM Group is one of two developers that have agreements with the agency to move forward with office construction. (CIM is in escrow on the property in question and will not comment further.)
Currently, Hollywood is viewed as a relative bargain, compared with entertainment hubs like Santa Monica to the west and Burbank to the north.
Ms. Hisserich sees a pleasant oddity in Hollywood's apparent ascendancy in the regional office market. "I am getting calls all the time from entertainment firms looking for space," she said. "It's nice to see," she added, "that the entertainment industry has taken notice of Hollywood."
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