Koll Development Co. obtained $15 million in financing last week that will enable it to break ground immediately on a $40-million speculative office project at Colorado Boulevard and Lake Avenue in Pasadena that had been stalled while the company awaited the final portion of its financing.
Koll obtained the final $15 million from Haverford Capital Inc., the financing arm of El Segundo-based Highridge Partners, a real investment and development firm.
The 176,170-square-foot Koll project at 1021 E. Colorado Blvd. will be the first new office project built in downtown Pasadena since 1991, said Patrick Church, a CB Richard Ellis broker who is marketing the office space for Koll.
Construction had been set to begin months ago, but Koll had difficulty finding the final piece of financing for the project, according to Gary Toeller, a Koll partner in charge of the development. Toeller said Koll completed grading for the site while seeking the last $15 million. Besides the funding from Haverford, the project includes $18 million in construction financing from Corus Bank of Chicago plus $7 million from NorthStar Capital Partners of New York, Toeller said.
"Construction financing is at the point where most lenders are only going to provide about 50% of the cost of a project," Toeller said. He said lenders have remained skittish about financing speculative office projects ever since a shake-up in world capital markets in the fall of 1998 that was blamed on Asian and Russian economic problems. A speculative project is one in which a builder begins construction without any tenants lined up, in contrast with a build-to-suit project developed for a specific tenant or tenants committed to leasing space.
Before the downturn in late 1998, lenders would provide up to 70% of the financing for speculative projects, Toeller explained. With most construction lenders now providing only 50% of the financing, developers must either invest more of their own money or find other sources of capital--often called mezzanine or bridge loans.
Haverford Capital considers the Koll project a good risk because of the relatively low vacancy rate in Pasadena's office market and the expectation that demand for office space there will remain strong, according to David B. Blenko, president of Haverford.
"The market is pretty tight, and from our perspective, it looks like it's only getting tighter," Blenko said.
The office vacancy rate in Pasadena was 7.6% for direct space and 10.4% including sublease space as of Sept. 30, according to Cushman & Wakefield.
As a rule of thumb, real estate experts say the time is right to build speculative office space when the vacancy rate declines to 10% or below.
"We're part of Highridge, and Highridge in general is not afraid of speculative development," Blenko said. "We try to identify in-fill projects where we can get in relatively early in the development cycle, before everyone is doing it."
Koll's Pasadena project was designed by Langdon Wilson Architects of Los Angeles, with Koll Construction of Newport Beach as the contractor.