Is Arts District Creative Office a Good Investment?

Aleks Trifunovic is the president of Lee & Associates West L.A. office.

LOS ANGELES—The Downtown renaissance has attracted many, many investors and, in turn, has catapulted pricing to record levels across product types—but not every downtown submarket has hit its stride. In the Arts District, creative office product rivals pricing on the Westside, but the demand for the same product type is lacking. It is a potentially dangerous combination. Should investors take on the risk? We asked creative office expert Aleks Trifunovic , president of Lee & Associates West L.A. office, if he has seen creative office investors heading to the Arts District for opportunities. He says that because of the low tenant demand and the abundance of space, he isn’t recommending it. “You can buy something in the Arts District for $550 per square foot with no tenant demand, or you can buy something in West L.A. for $550 per square foot with tenant demand,” Trifunovic tells GlobeSt.com. “I love the Arts District and there are great things going on there, but I am telling investors to be careful.” Pricing in the market is $500 to $700 per square foot for a 5,000-square-foot to 10,000-square-foot building and the rental rates hover above $3 per square foot, compared with emerging markets like Culver City, with $3.50 per-square-foot rental rates. High rental rates are the real issue here. The market competes with some of the equally emerging and very hip West L.A. markets, like Culver City, which have the benefit of being proximate to major tech tenants in Santa Monica and Playa Vista. “If the market was a low-price alternative, you would have seen more tenant demand, but you are actually not getting a discount to go there,” says Trifunovic. “There is a premium. It is all based on projected rents.” Lee & Associates CEO Jeff Rinkov echoes the rental rate issues in the Arts District submarket. “Rental rates have really popped in advance of the tenant demand. Usually what happens is that vacancy and scarcity drive rental rates,” he tells GlobeSt.com. “Here, it is the spreadsheets driving rental rates.” Trifunovic and Rinkov agree that it could take a decade for the market to pop, and that, much like Playa Vista, the market will need to go through a cycle of tenants first. “If a tenant wants to be there, we definitely show them their options,” says Trifunovic. “We have taken tenants back and forth, but for tenants that don’t have a fashion background, they haven’t made that leap. The trouble that you have now is Downtown. You need someone to come in and plant its flag. Everything now is speculation.”