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TECH Downloads Real Estate at High Speed: A Discussion of SoCal Market Trends for Media/Tech

12/10/2018 10:38 AM | Cinnamon Thompson (Administrator)

The creative media industries have long been synonymous with the Los Angeles metro area. It is estimated that about 1 in 6 citizens in Los Angeles County work in the creative industry in some capacity. More recently, tech has also made a lasting impression on the state of California, in more than one major city. While the bulk of the tech industry remains concentrated in the Silicon Valley and San Francisco metro area, Los Angeles has seen an influx of these companies arriving to conduct business operations. Both the tech and creative media industries attract a talent pool of highly skilled and creatively inclined workers from which to hire.

The effects that these industries have on our real estate market are well documented and often a source of discussion among California residents. The high-paying jobs in the tech industry are often scapegoated as the primary force driving up rents and home prices. On the commercial side, many of the streaming services, most notably Netflix, are buying and leasing large commercial spaces for content creation purposes. Not only do these endeavors require a large amount of space, but they often aim to develop in highly desirable and already densely populated locations.

On November 13, SCDF hosted a Creative Media in Real Estate panel at City Club LA. The panel consisted of 4 real estate and development professionals who weighed in on what it takes to secure a prominent tech or creative media tenant in a commercial space in the Los Angeles market. Moderated by Michael White, AIA, Managing Principal at Gensler, the panel discussion touched on tariffs, construction challenges, and the ripple effects of these industries when they enter a market. Panelists included: Christopher J. Barton, EVP of Development and Capital Investments at Hudson Pacific Partners, Dean B. Rostovsky, Managing Director and Acquisitions Officer at Clarion Partners, and Ryan Smith, EVP of Investments, Western US at Hackman Capital Partners.

The Effect of Tariffs on Development

Dean Rostovsky opened the discussion by touching on the effect of the trade wars on development as a whole. He noted that the first set of tariffs to arrive affected the cost of aluminum and steel, which was about a 20% increase. The second wave of tariffs came in the middle of the year and affected secondary building materials such as tile, granite, and other materials used in the production of household fixtures like countertops and cabinets. The Chinese government subsidized many American companies who were being subjected to these tariffs, so the effects of these taxes have been minimal so far. This offset by the Chinese government has ensured that most negative impacts have remained largely unfelt, especially for those major tech and creative media enterprises who usually have significant construction or real estate budgets. However, labor has also been affected. Certain segments of development are able to pass along higher labor costs to tenants, which is more common in commercial and industrial real estate. This “passing the buck,” so to speak, in labor costs, is far more difficult to do when dealing with residential real estate. While these challenges regarding labor costs are much more difficult to mitigate, Chris J. Barton of Hudson Pacific Partners shared one simple yet highly effective strategy for dealing with tariffs.

“We bought large amounts of material, and stored it for future use,” said Barton. “However, this is not a permanent solution as we will eventually run out of stored material and have to purchase new. The labor shortage is a far more pressing issue for our industry,” he continued.

Creative Media and Tech Tenants

Barton continued the conversation by revealing that much of the new development for Hudson Pacific Partners has been directly associated with the demand for new content by Netflix. He noted that streaming services, or new media companies are spending over $24B in content creation, of which Netflix comprises over 50%. Currently, Netflix is at about 2.1 million square feet total space in their portfolio. May 2015 is when Netflix really began to grow, and in this timeframe, Hudson Pacific Partners was able to strike a 10-year-deal with Netflix for studio and production space. Barton noted that while promising, a deal of this magnitude is highly atypical, especially for the creative media industry, which typically signs one-year leases.

Netflix has an advantage in the eyes of developers due to their unique need for major and diverse property types such as soundstages, creative offices, and support space. The addition of studio lots and content creation space has made them even more enticing to developers. Tech and creative media companies, especially those that are newly built, tend to have more inventive architecture, with a mix of indoor and outdoor spaces, as opposed to a traditional high-rise structure. This requires developers to collaborate with architects for innovative designs. Gensler was noted as being the architect of record for both Icon Venue Group and EPIC, two creative office campuses located in Downtown Los Angeles and Hollywood, respectively. EPIC is currently in the early stages of construction. Digital renderings showcase multiple outdoor terraces, flanked by modestly-sized trees. In addition to Netflix, Dean Rostovsky, of Clarion Partners pointed out that there is a huge demand for commercial space from a mere six or seven companies. Among them are household names like Google, Facebook, Amazon, Apple and Microsoft.

“This demand encompasses both leasing and controlled floor area ratio (FAR), which is happening most prolifically in the Bay Area,” said Rostovsky.

The Ripple Effect on Housing and Development

One negative side effect of the tech and creative media boom, is the housing crisis. However, the actual root causes can vary from city to city. Los Angeles is noted as being much more difficult to build in than other cities, where tech and creative media left not only a large footprint, but a positive impact.

“There can be a supply response in Seattle or San Francisco, but it’s much harder to get that supply response in Los Angeles,” said Rostovsky.

Rostovsky also shared renderings of the upcoming Culver Studios project, which will be different than the usual “live-work” model. This project will exemplify a “work-work and work-play” mixed-use facility. Projects of this magnitude often take up multiple city blocks, which can further limit available housing in the neighborhoods surrounding the development. In some cases, housing will be repurposed for studio, creative or tech office space. The reduction of the housing supply directly affects the value of homes and apartment rentals, which further perpetuates the housing crisis for all residents. The lack of both usable space and housing, has pushed developers to persuade tech and media companies to seek spaces outside of the traditional industry centers. Culver Studios and Sony, both located in Culver City, are prime examples of creative media moving out of Hollywood and into less dense and under-utilized neighborhoods.

Another unique characteristic of many tech and creative media companies seeking new developments is the tendency for them to favor transit-oriented-developments, or TOD, in densely populated urban centers. While this sounds ideal for most large businesses, tech and creative media differ in the sense that they often favor TOD but also demand ample parking spaces due to the nature of their trades. Meeting such demands requires developers and architects to adopt extreme levels of creativity and resourcefulness. This is especially apparent in Southern California, where mass transit has not fully arrived in terms of widespread public usage. Panelists all agreed that while mass transit may be the way of the future, a reluctance on the part of tenants to rent a space without sufficient parking is still a very real obstacle.  

“Development is spurred by these transport hubs, but parking is still a requirement, so all of our projects begin with parking structures,” said Michael White of Gensler.

“Whether they remain parking structures in the future is yet to be seen,” he added.

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