Hollywood's Roaring Comeback As A Real Estate Market

For most of the world, Hollywood means big-budget entertainment. For the greater LA real estate industry, Hollywood is a market back from decades of doldrums, leveraging its highly recognizable brand into new growth across the spectrum of residential, retail, office and, of course, entertainment, according to the speakers at Bisnow's recent Hollywood Highlight event.

Netflix Workplace Services Manager Ochi Scobie said that at one time, it did not look like feature production — or much development at all — would come back to Hollywood. But the opening of the Red Line through the market in the early 1990s was a critical factor in kick-starting the revival of the area.

"Now Hollywood is a live-work-play neighborhood, with a strong creative ecosystem," she said. "That's why Netflix wanted to be here. The best talent is here again."

Just last year, Netflix inked a deal to occupy the entire 323K SF Icon building at Sunset Bronson Studios, a development of Hudson Pacific.

"There's a new cachet to Hollywood," Scobie said.

Recent growth in the market has included thousands of residential units, new hotels and restaurants, Clarion Partners Director of Acquisitions Dean Rostovsky said. 

That has laid the foundation for office growth.

"Hollywood's always had a great location, accessible by freeways and then the Red Line, and it's a brand that people know — maybe the best-known brand anywhere," he said.

As an investor in Hollywood, Clarion Partners prefers more traditional office space, though with some elements that accommodate creative industries, such as screening and sound rooms, Rostovsky said.

"That's what tenants want. That and being in Hollywood."

Hollywood is once again an ideal location for infill urban development, Paramount Contractors and Developers Executive Vice President Brian Folb said.

"There's real demand here, more than other submarkets in West LA, and real rent growth."

For years, the studios were not interested in returning to Hollywood.

"There were no incentives to stay, and not enough high-end product," Folb said. "Now, Hollywood is a mixed-use 24-hour environment. The subway got things rolling, and then apartment development encouraged retail and entertainment projects. Now creative talent wants to be here, and so do the companies that employ them."

Kilroy Realty Corp. Executive Vice President David Simon said despite the quite long current cycle, there is no sign of a slowdown in demand for office space in Hollywood.

"Content creators want a home, and the ecosystem is here," Simon said. "Also, Hollywood is one of the best-known brands in the world, and they want to be associated with that."

Costs are high and entitlements amount to a long, tough process, but once those are overcome and a development lines up financing, Hollywood is a good market to be in, Simon said.

"People want to be here again," he said. "That's the key."

Related Executive Vice President Gino Canori said his company has been a fan of the Hollywood market for 15 years, and that it is evolving as it should, with residential, hospitality, office and entertainment development.

"It's complex to get development done, so there's not a lot of product coming online all at the same time, but deals are getting done," Canori said.

In the case of Related, its 1755 Argyle Ave. development next to the Capitol Records Building has been a long process, complicated by the concern that there might be a fault line under the site. There is not, but it took time and effort to prove that.

Milender White Construction Executive Morgan Lysohir said a major challenge in construction in Hollywood, and the entire LA market, is rising costs. But there are ways for developers to deal with it. 

All of the partners in the development need to be in the process as early as possible, Lysohir said. That is critical to controlling costs.

Essex Property Trust co-Chief Investment Officer and Executive Vice President John Eudy said it is more challenging than ever to get development deals done in Hollywood — entitlements take years, and there is always an element of NIMBY to fight against — but the rewards are high. 

Also, Hollywood is one of the more interesting markets anywhere. Eudy cited Essex Property's development next to the Earl Carroll Theatre, and its work on the theater, as an example.

"The space has a lot of history, and the community wanted to protect that," Eudy said. "So we're doing an adaptive reuse to turn it into a 38K SF creative office complex. It's certainly going to have the cool factor."

Cal Coast Cos. CEO Edward Miller said The Rise Hollywood, which his company started assembling land for in 2014, was something of a pioneering effort in Hollywood at the time. A lot has changed since then, with the market reaching a critical mass of growth.

Even so, development in Hollywood is challenging.

"You need an excellent team of consultants, of legal and land use counsel, to make your way through the local environment," Miller said.

"Hollywood isn't quite like anywhere else, not even in the rest of West LA."

AvalonBay Senior Vice President Development Mark Janda said the key to development in Hollywood is to be as open and honest with the community as possible.

"The redevelopment of the former Circus Disco is an example," he said. "We listened to what the community wanted."

AvalonBay's apartment development on the site will spare many of the remaining features of the old disco and incorporate them into the project, Janda said.

"We're including parts of the Circus Disco, with artifacts that let people know its role in the LGBT community."

Brookfield Property Group Senior Vice President, Development Beatrice Hsu said it is critical for a developer to earn the community's trust. It is simply the way business is done here.

"There's so much activity here — residential, office, hospitality, entertainment," Hsu said. "That makes for a dynamic, creative place that appeals to residents and tourists."

But it also is making land prices go up. So even though the residential market in LA has been underbuilt for decades, Hsu said, it is hard to put together new development deals in Hollywood because of price expectations for the land.

Stepp Commercial Vice President Mark Ventre said multifamily sales volume in the Hollywood market is on track this year to be roughly the same as last year. Through the first week of October, there have been about 110 deals, compared with 120 during the same period in 2016.

"There's been a little cap rate compression, from just 4% last year to just under 3.9% now," Ventre said. "Why are investors willing to pay more?"

Rents are still growing at a healthy clip, about 3.8% per year, despite new product coming online. Also, renovating midcentury product can be a very profitable value-add play.