Show business takes a trip to the beach.

Santa Monica is new entertainment center

SANTA MONICA - Hollywood is being transported to this beachfront city.

In the last two months alone, Santa Monica has seen MTV Networks, movie producer Rysher Entertainment and ad agency Rogge Effler & Partners collectively sign leases for nearly 200,000 square feet of local office space.

Other major "name" players will likely join the impressive roster of relocations that some say started when Metro-Goldwyn-Mayer Inc. moved from Culver City three years ago.

The migration has reached the point where demand for business space is rapidly catching up with the city's limited supply. That, in turn, is spawning a real estate revival, as rents and property values climb back from their recessionary troughs.

Hollywood Digital Inc., a TV commercial post-production house, is one recent example. Its planned expansion from Hollywood to Santa Monica reflects many of the trends drawing the creative fields beachward.

They include the synergy of so many creative businesses within walking distance of each other, the ability to customize nontraditional digs, and the proximity to executives' residences.

Plus, there's the weather.

Hollywood Digital maintains its primary corporate office on Sunset Boulevard in Hollywood. But when company officials recently determined that a second location was necessary, it opted for a freeway-front Santa Monica office building - heavily damaged in the Northridge earthquake - that Chief Financial Officer David Cottrell described as a "diamond in the rough."

Hollywood Digital has agreed to lease the top floor of the four-story former Argo Petroleum headquarters building for 10 years.

The firm is now negotiating for additional space with the owners, who bought the Lincoln Boulevard property out of foreclosure post-earthquake for "almost nothing," said Carleen Kemmerling, the Landmark Commercial Group broker who represented the tenant in the lease negotiations.

Cottrell said he liked the idea of the company creating its "own space and atmosphere" at the renovated building. But more importantly, he continued, Hollywood Digital was attracted to Santa Monica because so many ad agencies, production companies and editorial houses have taken offices nearby.

And, Cottrell added, "I'm the first to admit that I'm a Santa Monica resident, and I like the idea of working close to home."

Along with its proximity to executive housing, Santa Monica offers media/entertainment firms "a style of 'lowrise' buildings more conducive to creative processes than highrises," said Peter Best, a veteran Westside office specialist with real estate brokerage Grubb & Ellis Co.

What the creative types want - and have been able to find in Santa Monica - are "studios with views," as Best put it.

But he and others noted that space is becoming scarce here in the wake of steady leasing activity - much of it driven by creative industries over several calendar quarters. And that is driving up office occupancy rates, rents and values.

When high-profile tenants such as MTV and Rysher move into town and swallow up 100,000 and 62,000 square feet, respectively, "there's a multiplier effect," said Harry Bateman, Grubb & Ellis' Westside research director.

"You get the support services - the lawyer, the accountant, the deli, who (each) take 1,000 or 2,000 feet, and that adds up," Bateman added.

The result is that Santa Monica office tenants have leased more space than they've vacated during 10 of the last 11 quarters, Bateman said.

That's brought the official vacancy rate down to 7 percent. (The actual percentage of space available is a bit higher when sublease space is factored in.)

It also makes would-be office developers more optimistic than they've been in years about signing up enough "pre-lease" tenant commitments to secure construction financing.

The most discussed examples of such projects in-the-works are the big Water Garden phase two "Class A" office project and the adjacent Arboretum mixed-use development in eastern Santa Monica's thriving Colorado/Olympic corridor.

Water Garden marketing chief Cliff Goldstein said some tenants can't find appropriate existing offices in Santa Monica, and have thus become more concerned with availability than rental rates.

Arboretum partner William Hammerstein noted that rents will likely reach levels needed to justify new development - perhaps $2.75 per square foot monthly, including maintenance costs - within a year.

He added that a big entertainment-related tenant has expressed interest in leasing as much as 430,000 square feet of Arboretum offices on a "build-to-suit" basis.

"What the creative fields say they want is the non-traditional space with high ceilings, exposed duct work, operable windows," Hammerstein said.

The demand for space and the related rising rental rates and values - along with Santa Monica's restrictive zoning - are clearly attracting real estate investment capital.

"Institutional" investors recently purchased a pair of downtown Santa Monica office towers, and an entrepreneurial local developer bought a big Colorado Avenue property.

Santa Monica's M. David Paul Development LLC purchased the 300,000-square-foot former Tenet Healthcare Corp. headquarters at 2600-2700 Colorado for about $37 million and leased a third of the building to MTV's western regional headquarters operation.

Brentwood-based Douglas Emmett Realty Advisors bought the 12-story First Federal Square tower at 401 Wilshire Blvd. on behalf of its institutional clients for around $38 million. And an institutional client of Newport Beach's PM Realty Advisors just bought the six-story tower at 429 Santa Monica Blvd. for more than $12.6 million.

Local real estate investors headed by Stuart Rubin had purchased that property - hardly 50 percent leased at the time - for less than $9 million in late 1994. They closed a profitable sale after bringing occupancy up to 95 percent - with recording studio Asahi Magnetvision taking much of the ground floor.