Spotify Close to Finalizing Arts District Office Lease

Spotify Close to Finalizing Arts District Office Lease

Downtown LA’s Arts District continues its momentum, almost finalizing a big win with Spotify’s new office. Especially with their high profile IPO, this will draw a lot of attention and increase demand for this already popular submarket. But this also portrays the main issue with the Arts District right now – it is mainly a larger tenant market right now (eg Warner Music was another recent large lease). Most buildings are requiring a huge capital investment to make them proper creative office and the 5k-25k SF tenants who don’t want to sink a ton of capital into their building and do a 10 year lease don’t have many options. Nonetheless, we have found success for companies in this size range to still find a great new home in Arts District, the options are just less. 10 years from now, when second generation offices begin popping up, the game will change for the better.

CoStar - http://www.costar.com/News/Article/Spotify-Close-to-Finalizing-Arts-District-Office-Lease/197811?rpt=1

Music streaming service Spotify is close to taking a large portion of the office space in the At Mateo development in downtown Los Angeles’ Arts District. It's the second major music company to move to the gentrifying neighborhood, where Warner Music Inc. will be relocating later this year. 

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Spotify is finalizing a deal for 110,000 square feet of office space at 555-581 Mateo St. with ASB Capital Management LLC, according to sources. The 184,000-square-foot At Mateo development is envisioned as a retail "country mart" shopping center with two floors of office space. Developed by Blatteis and Schnur, the project consists of redeveloped warehouses designed from brick and steel taken from a former brewery in Ohio in a design that provides the type of 'creative' office space popular with tech companies. 

Terms of the office lease agreement are not yet clear. Asking rates at the project are about $3.50 per square foot, according to CoStar data. 

The lease comes ahead of projected growth for Spotify as it plans an expected IPO later this year. The lease would be a significant expansion for the firm that currently has about 8,200 square feet of office space in Luckman Plaza, 9200 W. Sunset Blvd. in West Hollywood. 

"Downtown L.A. is becoming a dynamic hub of innovation and creativity across a diverse range of sectors, and that is particularly the case for companies at the intersection of sectors, such as technology, music, fashion and media, design and communications," said Nick Griffin, director of economic development at the Downtown Center Business Improvement District. "Coupled with Warner Music’s relocation, Spotify’s move not only makes perfect sense for them, it is indicative of a trend we expect to accelerate over the coming years." 

Spotify’s relocation could also further solidify the Arts District’s reputation among music companies. Warner Music signed a high-profile deal for 257,000-square-foot with Shorenstein Properties in the The Ford building at 777 S. Santa Fe Ave. in 2016 and plans to relocate from its longtime home in Burbank. 

Spotify has a critical licensing deal with Warner Music, the third major label to partner with the company, that it renewed in August. 

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Spotify had been actively considering the Arts District for some time, with the firm reportedly narrowing its choice between the At Mateo development and Hudson Pacific Properties’ Fourth and Traction, a redevelopment of the former Coca-Cola Co. facility nearby. 

The neighborhood has attracted a huge influx of developers and speculators in recent years, betting millions that it could be the latest corner of downtown to revitalize. 

Despite all the attention, the Arts District hasn’t caught on as quickly as many observers expected. Besides Warner Music and Hyperloop, few companies with household names have committed to relocating here. 

Scott Steuber, a senior vice president at CBRE Group Inc., said he has had several clients who love the concept of the Arts District but had reservations about limited parking and the cost to build out the dated warehouse structures into useable office space after touring the area. 

"For the smaller users, say those in the 5,000 to 25,000 square foot range, the capital required to convert a lot of these core and shell opportunities or current industrial warehouses into creative office is tremendous," he said. "The cost is upwards of $150 to $200 a square foot, easy. So to ask a venture-funded tech or even later-stage tech company that doesn’t have a full grasp of their growth needs to commit to a 10-year term to get a contribution (from the landlord) toward that capital requirement, they pretty quickly get cold feet." 

Lately, landlords have been more willing to concede on the length of the lease before springing to cover some of the build-out costs. Couple that with a headline-grabbing deal like Warner’s and now Spotify’s and things may heat up even further in the Arts District. 

Already brokers report that interest in the Arts District appears to be growing among more institutional companies and developers. Several restaurants and shops have opened and Atlas Capital’s ROW DTLA, a large century-old rail distribution facility turned retail and creative office in the Arts District, is attracting several widely known retailers, including Adidas. 

That interest is expected to grow as the greater Downtown Los Angeles market continues to boom and fill up with residents with disposable income who could be attractive to a company with a growing workforce. 

Cushman & Wakefield's Andrew Tashjian directs the leasing for the At Mateo project but could not be reached for comment. Jones Lang LaSalle Inc.'s Tony Morales represents the tenant but declined to comment.

*Shared by Jeff Vertun

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