YOUNG/mike1st/mark2nd By BRAD BERTON Staff Reporter A new ownership group has emerged to develop a long-stalled highrise project in Glendale which could become the L.A. area’s first “speculative” office tower of the’90s. A partnership headed by local investors closed escrow last month on the property, located on Central Avenue near the Ventura (134) Freeway. The project is termed “speculative” because it is being developed without any signficant tenant lease commitments. Developers expect to break ground this summer on the $100 million highrise. Plans for the 24-story, 500,000-square-foot tower illustrate the strong recovery of the commercial real estate market in Glendale, Burbank and Universal City a recovery boosted primarily by the entertainment industry’s rapid growth. The local investors, operating as PacTen Partners, have teamed up with a real estate investment fund managed by an affiliate of Morgan Stanley & Co. to purchase the property from a Korean-American development company. That would-be developer, an affiliate of Mid-Wilshire-based K. Young Development Inc., had purchased the site at 655 N. Central Ave. nearly two years ago for $6 million and originally expected to break ground by the end of 1995 and complete the project in mid-1997. After its Korea-based parent company ran into financial troubles, however, K. Young quietly put the property up for sale last year. K. Young had dubbed the project Palladian World Tower. Nyal Leslie, one of the PacTen partners, said the new development team will pick a different name. The new owners, however, have decided to retain the architectural design that the Landau Partnership created for K. Young, with only minor alterations. Entertainment giants Walt Disney Co. and Warner Bros., in particular, have been quickly leasing up downtown Glendale offices and driving up rental rates there, after they couldn’t find sufficient available space in Burbank’s Media District. Leslie said his PacTen team expects to lease space in its new tower to more-traditional commercial tenants, such as insurance and banking companies, as well as to media-entertainment tenants. “Entertainment has clearly been the driving force that has reduced vacancies and increased rents to a point that justifies new construction in Glendale,” Leslie acknowledged. “That sector has accounted for perhaps 60 percent of the recent office absorption in Glendale, and that clearly indicates that there’s a substantial corporate market out there as well.” Leslie, the former Metropolitan Structures executive who oversaw development of the massive California Plaza office complex in downtown L.A., said Glendale’s low office vacancy rate, strong demand and rising rents make this speculative highrise project a solid investment. “We wouldn’t be doing this in downtown L.A. or just about any other Southern California market,” Leslie said. The overall vacancy rate of downtown Glendale’s Class A office buildings is about 5 percent. And commercial real estate consultants have projected that the $29-per-square-foot annual rental rate required to justify new Class A highrise construction will soon be reached. Ned Fox, a principal in the downtown L.A.-based CommonWealth Partners commercial real estate firm, said PacTen Partners’ plans reflect recovery in both the tenant market and the real estate capital market, and likely signal the start of the next wave of local office development. “It’s following a trend that started a year or two ago on the East Coast and has been moving west in reaction to rebounding real estate markets and economics,” Fox said. “We are still lagging here in Southern California, but we will see more development in the dynamic markets, such as Glendale, Burbank and the Westside.” Speculative projects such as the one slated for Glendale represent a “natural progression” for big real estate investment funds, such as Morgan Stanley’s, to move from acquisitions into developments as values of existing buildings start approaching actual development costs, he added. Leslie said the PacTen/Morgan Stanley team “intends to take advantage” of the favorable conditions in downtown Glendale before prospective competing projects get going. With a “solid capital resource” behind the project in the form of Morgan Stanley Real Estate Fund II, Leslie said the development team should be able to attract construction financing on favorable terms with or without any substantial pre-construction tenant commitments. “We hope to have some preleasing by the time we start construction, but we are committed to ordering steel (for the tower’s frame) and going ahead with or without a tenant,” added Jeff Dritley, Century City-based president of the Morgan Stanley Real Estate Fund. “We think the market dynamics are right for a new ‘spec’ building; it’s the right time in the (economic) cycle to do prudent, selective development.” Dritley added that timing was also a consideration in the team’s decision to proceed. “Glendale is a great city to do business in, and we think we can bring a building to market six to 12 months quicker than anyone else,” he added. Leslie said the PacTen/Morgan Stanley team is paying more than the $6 million K. Young paid for the site two years ago when the property included a vacated medical building that has since been razed. But he said the team paid less than the $13 million the previous would-be development team paid back in 1989 when property values were near their peaks. PacTen, technically a Delaware limited liability company, includes Leslie and local real estate veterans Pete Hillman and Dennis Fitzpatrick. The partnership’s name is derived from the fact that all three partners played varsity basketball while attending colleges now in the Pacific 10 athletic conference.
