Real estate investors bet on the next big thing for L.A.’s Arts District: Offices

In recent years, the once-gritty Arts District in downtown Los Angeles has seen an influx of restaurants, bars and residences, including large apartment projects from major developers.

But now, with the streets cleaner and more lively, real estate investors are betting on a different type of property: offices.

Developers, including Hudson Pacific Properties and Atlas Capital, are converting old buildings in anticipation of the neighborhood emerging as a hub for entertainment and technology companies that once saw the San Fernando Valley and the Westside as their first choice.

On Monday, the neighborhood’s transformation got a further boost when prominent New York real estate company Tishman Speyer paid $24.5 million to acquire a 1.7-acre office campus that is home to Hyperloop One, which is developing a radically new type of mass transit system.

Tishman, the owner of New York’s Rockefeller Center, purchased the three buildings from Lion Real Estate Group and the Borman Group, two Los Angeles companies. The New York firm declined to detail its plans for the site, but said the creative office campus “could be expanded.”

“After making major investments in Beverly Hills, Playa Vista and elsewhere in Los Angeles, we are now pleased to gain this foothold in the Arts District, where we can participate in its rebirth,” Tishman Speyer Chief Executive Rob Speyer said in a statement. “We look forward to pursuing additional opportunities as well.”

Hyperloop declined to comment, but the company is expected to stay at its current location, said real estate broker John Zanetos, a senior vice president with CBRE Group Inc., who represented the sellers.

Hyperloop One is developing high-speed transportation lines that would use a mix of electricity, magnetism and air pressure to propel cargo and passenger pods through tubes. The concept was publicized by billionaire entrepreneur Elon Musk in 2013, who isn’t directly involved with Hyperloop or other companies pursuing the idea.

The purchase of Hyperloop’s buildings by Tishman, which also owns office buildings in Hollywood, Westwood and near Los Angeles International Airport, comes as major investors are pouring millions into the Arts District.

In all, more than 1.2 million square feet of office space is under construction there – mostly conversions of old buildings, according to CBRE Group Inc.

In early October, Warner Music Group agreed in a $100-million-plus lease to move from Burbank’s Media District to a renovated former Ford auto plant on Santa Fe Avenue. San Francisco real estate investor Shorenstein Properties acquired the 4-acre industrial complex in 2014 for $37 million with plans to turn it into creative offices with ground-floor shops.

Real estate experts described the 257,000-square-foot, 13-year deal with the record company as a watershed moment that could turn the emerging neighborhood for creative firms into a hub of entertainment and technology.

Jim Jacobsen of brokerage Industry Partners predicted smaller music companies will now set up shop.

“When a Warner goes into a neighborhood, you usually have a huge following that follows them like satellites orbiting around a big gravitation force — from music, to sound design, to post production,” he said.

That’s a plus for properties where he handles leasing, including Row DTLA, a collection of old warehouses off Alameda Street being converted into creative offices and retail.

The 30-acre project, once known as Alameda Square, is being developed by New York City’s Atlas Capital Group and Square Mile Capital. In all, 1.3 million square feet of creative offices are planned for the development.

Until the Warner deal occurred, such large office investments had failed to land a major tenant, sparking some concern over the direction of the neighborhood.

“There was a lot of hesitation from different users on making a decision on coming to the Arts District,” said Zanetos, who also represented landlord Shorenstein in the Warner deal. “They kind of felt it was a little too much of a trail-blazing decision.”

One of the near misses was BuzzFeed. The New York media firm toured the former Ford factory and negotiations reached advanced stages before it backed out and opted instead for Hollywood.

The Warner lease “has taken a lot of weight off the owners’ shoulders, because everyone had been waiting for the big deal,” said Mike Condon Jr., an executive managing director with brokerage Cushman & Wakefield, who was not involved in the transaction. “We now have the one big fish. Hopefully the dominoes will start to fall.”

Leasing should also accelerate because many of the developments are nearing completion, enabling prospective tenants to have a better vision of their future home, said real estate broker Brandon Gill, a senior vice president with CBRE who partnered with Zanetos on the Warner and Tishman deals.

That well-known companies are even considering moving in to the neighborhood is a change.

In decades past, the area between the L.A. River and Alameda Street was largely home to produce companies, garment manufacturers and toy makers. Artists rented lofts for dirt cheap and drug addicts tossed used needles into the street.

Simply put, it was the kind of place big-monied investors avoided.

Hudson Pacific is one of the newer arrivals. The Los Angeles developer is converting a former Coca-Cola bottling plant into a plush office and retail complex, a short walk from the new Hauser Wirth & Schimmel art gallery on 3rd Street.

The project, at 963 E. 4th St., will have about 25,000 square feet of retail and 100,000 square feet of offices and include a rooftop penthouse with an outdoor deck.

Hudson’s chief investment officer, Alexander Vouvalides, said that given the number of bars and restaurants in the neighborhood, he expects media and technology companies will be among tenants who sign leases at the project, known as Fourth and Traction.

Hudson has yet to land a tenant, though tours and inquiries jumped after it became widely known in the industry that Warner Music would move nearby, Vouvalides said.

Even without Warner, Vouvalides said it was only a matter of time before more companies started arriving, citing the evolution of other hip office markets such as the Meatpacking District in New York.

“It starts with residential and amenities [such as restaurants] and the office typically follows suit,” he said. “We think [the Arts District] is the next great up-and-coming office market in Los Angeles.”

Times staff writer Paresh Dave contributed to this report.

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