New Technology Firms: Their Impact Upon Commercial Real Estate.

Demand for office and Research and Development Space in the Los Angeles Basin is surging, growing at a pace that rivals that of the late 1980s. Much of the growth in demand is coming from "new technology firms" - firms that are tapping into opportunities brought about by the Internet and by increased computer capabilities.

In order to understand this phenomenon better and its implications for commercial real estate, we asked the managers and brokers at NAI Capital Commercial about the trends they are seeing in the marketplace. This article summarizes their observations.

What do new technology firms do?

In Southern California, the focus tends to be more on computer and Internet content and application rather than on computer manufacturing. On software programs rather than on hardware. On computer games and electronic entertainment. There also is a very large and vibrant biotech industry in the region, as well as renewed strength in firms designing satellite and communication equipment.

In addition, a growing number of firms is emerging applying technology in new ways in "old sectors". For example, Orange County has emerged as a center for using new, highly sophisticated technology in printing. Orange County and the South Bay have emerged as important computer assisted design centers for the automobile and apparel industries.

What types of firms are growing the fastest?

The majority of the growth is taking place among firms that have been in business in the area for approximately five to fifteen years, and are now expanding. These were small companies, with 5 on 10 employees, who now suddenly find themselves with 50 or even 200 employees.

There is also significant growth among the high-tech divisions of established traditional firms.

What is the labor force like in these firms?

The labor force in new technology firms tends to be young (20s and 30s), highly educated, affluent professionals. A large percentage is foreign-born. They work and play hard, and value creativity and independence.

Wherein the Los Angeles Basin is the most of the growth by new technology firms taking place?

Currently, most of the growth by new technology firms is taking place in:

* West Los Angeles, particularly in a high-tech corridor that has emerged between the ocean and the 405 Freeway from El Segundo on the south to Santa Monica and Westwood on the north;

* The West San Fernando Valley, in a corridor along the 101 Freeway from Newbury Park on the west to Warner Center on the east;

* South Orange County, including the Research Park near UCI, the Spectrum in Irvine and Aliso Viejo; and Pasadena.

Activity is also emerging in Camarillo and Santa Barbara.

Why these areas?

These are the areas with the highest quality residential neighborhoods in the Los Angeles Basin. The owners of new technology companies want their companies near their homes. Proximity to quality residential areas is also a very important factor in recruiting and retaining a high-skill work force.

Most of these areas are also near prominent universities, including UCLA, UCI and Cal Tech. This enables synergies with the faculty and resources of the university, and enhances the ability to recruit recent graduates.

In addition, these areas already have a critical mass of new technology firms. Once a critical mass is established, it tends to build upon itself. These areas become, in effect, think tank environments, where important face-to-face encounters can readily take place. A high level of movement by employees among firms is common, arid proximity of similar firms enables this. The proximity also enables small firms and suppliers to easily interact on large projects.

How great is the impact of new technology firms upon demand commercial real estate?

In the areas identified above, approximately 20% to 25% of the office activity and approximately 50% of the Research & Development activity is by new technology firms or divisions. This represents a very large amount of leasing activity - approximately 3 to 4 million square feet per year.

What are these firms looking for in terms of office or R&D space?

* New technology firms are looking for:

* Fun, creative, flexible, "loft-like" space

* High ceilings and large windows that open

* Balconies

* Concrete floors

* Exposed ductwork 

* A low-rise, campus environment

* Exercise facilities; basketball courts; BBQ areas

* Lush landscaping

* Large floor plates, open plans, modular partitions

* State-of-the-art HVAC, electrical, and high-speed access to the Internet

* 24/7 operations (air conditioning; security; access)

* 4 to 5 parking spaces per 1000 SF

* Services and amenities

* Expansion opportunities

* Signage - very important for establishing the credibility of new firms

* Quality environment

* Telecommunication security

* Proximity to quality residential neighborhoods

New technology firms are not very price sensitive, and are willing to pay top dollar for quality space.

What issues are emerging for landlords and how are they dealing with them?

The recent gyrations of the NASDAQ and lack of profits by many new technology and dot.com companies have raised some concerns regarding the risks associated with leasing to such firms. Tightening market conditions have also enabled owners to become more "discriminating."

In order to protect themselves, owners are typically requiring:

* Letters of credit;

* Cash in an escrow account;

* Co-guarantees; and, most importantly,

* A strong financial statement.

Growing numbers are also limiting the percentage of space leased to new technology and dot.com firms.

Opportunities clearly exist for serving this rapidly growing segment of the economy. The attraction to "fun and funky" space presents opportunities for repositioning existing, older retail and industrial properties. Areas that come to mind include older industrial facilities in the east San Fernando Valley.

However, attention must be given to the very special requirements of new technology firms, including adequate 24-hour parking, security and electrical systems. Also, the risks associated with these firms need to be understood, and protection established.

New technology firms need to understand that owners have significant concerns regarding risk, and are no longer as eager to obtain-just any tenant. Their best defense will be a well-prepared financial statement.

This article was provided by Lisa Liang, Director of Marketing for NAI Capital Commercial Real Estate.