Amazon’s much-hyped expansion—the company will place 25,000 new jobs each in New York City and Arlington, Virginia—highlights how insular the tech industry can be when it comes to real estate. Tech companies based in the San Francisco Bay Area, Seattle, Boston, and New York City have taken up more than 25 million square feet of new office space outside of their primary markets over the past five years, according to a recent CBRE report. A good chunk of that is within those same four markets.
In conversations about tech capitals, Los Angeles rarely comes up, a distant second in its home state to the dominant Bay Area, which vacuumed up $26.5 billion in venture capital funding last year. But LA’s position in the tech ecosystem may be shifting.
While nobody believes that dynamic will change, LA has begun to come into its own. Homegrown successes, and the recent opening of large satellite offices by big players including Google, shows how tech is evolving here. The Bay Area isn’t suddenly moving to Silicon Beach. But it is benefiting from the changing nature of what we consider tech.
“We’re going through a renaissance at the moment because of the growth of entertainment and content,” says CBRE vice chairman Jeff Pion. “There’s a merging of tech and entertainment, and content is king at the moment. The potential from harnessing the existing entertainment workforce in LA immediately is incredible.”
Silicon Beach—a nickname for the areas of Santa Monica, Venice, Marina del Rey, Playa Vista and El Segundo where tech companies are congregating—is expanding, with companies such as Spotify setting up shop in the Arts District near downtown, and aerospace firms clustering in South Bay and Long Beach. The city’s tech employment increased 14.6 percent between 2016 and 2017, with many of the biggest names in technology—Facebook, Google, Apple, Amazon, Netflix, Spotify, and SpaceX—having opened or announced plan to open new offices. The 100 largest tech companies in the city saw a 24 percent increase in hiring last year, according to data from the Annenberg Foundation.
That growth has put pressure on the region’s housing stock and local office rents, which grew 15.8 percent between the second quarter of 2016 and 2018.
According to Eric Pakravan, a vice president with Venice-based venture capital firm Amplify, the city has always led the nation in out-of-town VC investment—a nice benefit of being an hour plane ride from Silicon Valley—but even as more investment pours into LA tech firms, VC firms are setting up shop in Southern California (the number doubled from 2016 to 2017). In 2016, LA and Orange County startups raised $5 billion collectively, and LA is on track to set a record for VC investment in 2018.
“Five years ago, a founder who wanted to keep their company in LA would get a lot of questions,” he says. “Today, it’s like, why do I need to be anywhere else?”
Everything is tech, and tech is everywhere
As every industry embraces tech, a more economically diverse city like LA becomes more valuable. In the capital of remakes and reboots, old industries have become new again.
Unlike San Francisco, LA has a ready-made wellspring of talent in the entertainment and advertising industries—the Los Angeles Economic Development Corporation estimates the region’s entertainment and content industries generate $55.9 billion annually, and a recent study said the city’s film and digital media industries generated 265,200 jobs—and a larger, more diverse population and economy. That’s led expanding entertainment giants, such as Netflix, Amazon, and YouTube, who collectively plan to spend billions on original content annually, to sign massive leases for new offices and production facilities. A study by research firm Beacon Economics predicts LA county will add 16,500 digital media and film-related jobs in the next three years.
LA’s employee base is unique, says CBRE’s Pion, with has no shortage of tech, design, and film talent coming from schools such as Parsons, USC, UCLA, and Chapman.
“It may not be equal to Silicon Valley, but the startup community down here is pretty robust,” says Pion.
With the expansion of direct-to-consumer marketing and brands, the ease of setting up e-commerce on improved sales platforms, and the tech industry’s push into a wider array of industries, Los Angeles has become much more desirable for startups. The city has birthed new consumer brands such as Honest Co. and Dollar Shave Club, which was bought by Unilever in 2016 for $1 billion. Last year, 23 percent of LA’s tech funding deals were for consumer products, and another 23 percent were for media.
These startups can cluster in neighborhoods already home to companies within their industries. Music and fashion companies may cluster around downtown and the Arts District, and the next generation of media companies are in West Hollywood.
“It’s not as much that it’s strictly tech, it’s these hybrid companies in very tangible industries,” Pion says. “An financial tech firm may take over a big office in Sherman Oaks to be near the traditional center of accounting. You’re now seeing venture-funded tech startups expand all over the city. There’s no one area that dominates.”
Further south, in Long Beach and the South Bay, Elon Musk has tapped into Southern California’s aerospace heritage with SpaceX, a private space startup. The company recently received approval to build its Big Falcon Rocket at a 19-acre plot in the Port of Los Angeles, a development that has already supercharged South Bay real estate.
Along with Tesla and Hyperloop, which plans on opening a test tunnel in Hawthorne, Musk has helped generate another LA tech cluster. In addition to raising funds—SpaceX and Hyperloop raised $450 and $135 million last year, respectively—it’s already spurred on the construction of new offices and apartment complexes, and added more excitement to nearby redevelopment plans, such as the Port of San Pedro renovation.
According to CBRE’s Pion, the move south, to an area once dominated by defense contractors, is attracting aerospace and space companies, and, increasingly, other tech firms seeking space in a supply-constrained market.
Jesse Gundersheim covers the San Francisco office market for CoStar. He says a lot of the growth in LA is spillover effect, companies that would like to be near the Bay, but due to space and price constraints, simply can’t afford it. He finds companies that do move from the Bay Area tend to head to West Coast cities such as Austin, Denver, Portland, and Sacramento, where space is cheaper. And if they have the choice, he says, they’d rather pick LA than Austin due to the lifestyle benefits.
Changing real estate currents in Silicon Beach
This activity and talent base explains why nearly every tech giant has a significant presence in Los Angeles: Apple is leasing a space being built in Culver City near a new Amazon Studios office; Netflix continues to grow in Hollywood, leasing a new 13-story tower on Sunset to match its existing 14-story office; Google just opened a massive space in the cavernous Hughes Company airplane hangar that will, after renovations, contain 525,000 square feet of office space and expanded production facilities for YouTube; and Facebook is looking for 260,000 square feet of space in Playa Vista.
With those new companies and offices come more tech workers, who will continue to make an impact on local real estate. According to Stephanie Younger, who sells homes for Compass in Silicon Beach neighborhoods such as Venice, Playa Vista, and Marina del Rey, 65 percent of her buyers under contract are in the tech industry.
The number of techies and tech workers buying in Westside neighborhoods has driven up prices in an already-expensive area. While it hasn’t caused quite the same level of backlash as tech’s real estate takeover of San Francisco—the decentralized nature of LA, and the existing high prices, means the industry’s impact hasn’t been as concentrated—it has altered the homebuying market. For years, developers have been tearing down old bungalows on Venice side streets and replacing them with expensive, modernist boxes, or rehabbing with up-to-the-minute styles to appeal to 25- to 35-year-old buyers, says Younger. The growth of high, and higher-end, retail on Abbot-Kinney and Rose Avenue speak to the rising cost of living in Venice.
“Retail is probably one of the biggest indicators of what’s happened to this area,” she says.
The biggest catalyst in the emergence of Venice was the 2013 arrival of Snapchat, which decided to purchase an array of smaller spaces, including a beachfront bungalow, and gradually built a decentralized network of office spaces near the beach.
“Prior to Snapchat’s arrival, it wasn’t viewed as an office hub, it was a quirky beach town,” says Steve Basham, a senior market analyst at CoStar. “Over the last few years, it’s changed the character of the area, and there’s been lots of local resistance to the takeover. Snap [the parent company of Snapchat] took virtually all the available office space in Venice.”
In April, when Snap announced it was relocating much of its workforce, abandoning half its office space and moving workers into a traditional, centralized office in Santa Monica, it opened up 200,000 square feet of rental space -- and a discussion of the future of the Venice office market.
More than six months later, it’s clear Venice isn’t going anywhere. Basham said nearly 40 new leases have been signed in the last half year, nearly double the pace of the previous three years. It’s expected that a vacuum of that size would lead to lots of new deals, but it also shows the premium new startups place on being located on the Westside.
“There’s so much opportunity to get into Venice right now,” says Michael Springer, another local analyst at Halton Pardee + Partners. “You can spend all day looking at new spaces.”
As the city’s tech scene grows, that decentralized nature is one of its biggest drawbacks. According to a Boston Consulting Group study released this spring that looks at LA’s potential, “Stars Aligning: How Southern California Could Be the Next Great Tech Ecosystem,” the city’s sprawl constricts growth opportunities, making it harder to create the critical mass of companies and employees typically required for successful innovation. The upcoming 2028 Olympics, which promises a region-wide transportation upgrade, as well as an increasing number of homegrown successes, can hopefully alleviate that problem and help build larger clusters of like-minded businesses.
Still, according to the report, Silicon Beach, where tech giants keep expanding their footprints, shows one vision of a tech-driven future economy. It may be why Venice is now attracting scores of smaller startups, says Springer. It makes sense if you follow the money; many of the city’s VC firms, including Amplify, are clustered near Santa Monica and Venice. There may be more than a few looking to capture some of the Snap magic.