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Tech Rush Buying Into El Segundo

Although the area's building boom could go bust, observers say there's strong interest from Internet and new-media companies.


As "new-economy" tenants grab vacant commercial space in El Segundo and push rents and property values ever upward, real estate investors are scrambling to get in on the action. They are converting older office and industrial buildings for high-tech use, developing new specialized complexes and buying occupied office buildings.

"All of the sudden, we've got quite the hot market here," said Bob Tarnofsky, of Continental, a major property owner along the increasingly popular Rosecrans Avenue corridor bordering El Segundo and Manhattan Beach.

With its existing buildings mostly occupied, Continental plans to break ground this month on a 290,000-square-foot office tower at Rosecrans and Douglas Street. Continental has no tenants yet, but expects to open the building in about a year.

The building boom carries the risk of outstripping demand, said Tarnofsky and other real estate observers. But they point to strong interest from Internet and new media companies, and dwindling space in nearby commercial districts in the South Bay and Westside.

"There's more demand than supply in the market right now," said Jeff Trenton, president of Proficiency Capital. For example, as soon as struggling tech-equipment distributor Merisel vacates a 113,000-square-foot El Segundo Boulevard property, Proficiency bought last week, Raytheon will take over the entire building. Just weeks ago, Proficiency leased a long-empty industrial building the company had bought and renovated on Imperial Highway to Hughes Space & Communications and sister company DirectTV.

Among El Segundo's newest citizens are such Internet-related outfits as Exodus Communications, EMC Corp., Digital Media Campus and SupplySolutions. They join other tech notables including Computer Sciences Corp. and Infonet Services--not to mention some traditional aerospace giants such as Raytheon that have been converting their technologies from defense to commercial applications.

The El Segundo vicinity "is starting to look like a mini Silicon Valley," said broker Jim Jandro of Cushman & Wakefield's South Bay office.

What's drawing the techies--and lots of would-be landlords--to this relatively small district loosely flanked by LAX, the Pacific Ocean, the Rosecrans Corridor and the San Diego Freeway?

Factors range from geographic and demographic to technological and political. Among the district's key characteristics: relative abundance of viable development sites; a growth-minded city government; heavy fiber-optic cable infrastructure; diverse transportation access; expanding support amenities; and proximity to labor and residential bases.

Those factors and rapidly rising rents "place the El Segundo area near the top of the list of emerging office markets," said Gary Toeller, of Opus West's Los Angeles office. The developer will hold a formal groundbreaking Thursday for a $30-million office project at Grand Avenue and Nash Street. Opus hopes it will be ready for occupancy next summer.

Rents in the area's better office buildings are closing in on $3 per square-foot per month and are expected to keep rising. That's still way below going rates in top Westside locales--where rents can exceed $4 per square foot.

Tech companies are especially attracted to the area's extensive fiber-optic infrastructure, said Stan Moore, president of Overton Moore. In partnership with El Segundo's Pacific Coast Capital Partners, Overton Moore expects to start work later this year on the 170,000-square-foot Crosspointe office development in El Segundo. The partners have also signed a deal to purchase about 12 acres near the intersection of Douglas Street and Mariposa Avenue and plan to develop a 210,000-square-foot facility aimed at tech tenants.

El Segundo's technological tradition and ready-made labor force dating from its decades as home to the aerospace and defense industries are part of the formula that the high-tech and new media employers look for when seeking a home, added Hugh Greenup of Kilroy Realty. His company plans to upgrade to Class A status a vacant 117,000-square-foot Imperial Highway building it just acquired along with the fully leased adjacent building.

Certainly, the real estate professionals pouring all those millions into existing and future El Segundo office properties run the risk that a general economic recession--or even one mostly hitting the high-growth technology sector--could push property values back down. But strong tenant demand, along with a relatively conservative outlook by construction lenders, are keeping investors pretty comfortable with the outlook.

"If this area was sitting as an island in the middle of nowhere, I'd be a little concerned," said Erik Hansen, of Legacy Partners Commercial. But with most commercial districts short on space throughout the Westside as well as the South Bay, the El Segundo area is one of few where developers can provide businesses with opportunities to expand, he added.

Legacy is among the many firms doing so, having recently renovated and sold one office building to Exodus while quickly filling another renovated neighbor with mostly tech tenants. The firm is still considering various options for the adjacent 12-story building, which could end up renovated for offices, converted to a hotel or being razed in favor of a brand new office building, Hansen said.

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