Jeff Worthe still believes in office. But he knows it’s tough to persuade lenders and institutional partners to think the same.
“When they’ve sworn off a product type, it doesn’t matter what I can present or what I can commit, because they’re not doing it,” he said.
Worthe Real Estate Group owns and has developed more than 7 million square feet of commercial space across Southern California. And over the last 15 years, the firm has shifted to owning and developing more studios. In the last six months, the firm started construction on its nearly 1 million-square-foot redevelopment of the Warner Bros. Ranch Lot in Burbank.
TRD sat down with Worthe at his office in Santa Monica, which stands on the corner of Wilshire Boulevard and Ocean Avenue overlooking the Pacific Ocean. Rival office landlord Douglas Emmett owns the building.
He chatted about building an office project in 2009, the trouble with financing offices right now and why he’s not too concerned about competition in the studio space.
What keeps you in real estate?
It’s fun. Parts of it are — a lot of parts of it aren’t.
When my daughter graduated from college, she wasn’t sure what she wanted to do, so I took her to meetings. One was a construction meeting for the Frank Gehry project that we just finished in Burbank. One was with a restaurant tenant of mine, who was going to close because of COVID. I told her: “I’m going to pay you to serve lunches to the nurses at Children’s Hospital every day. That’s how we’re gonna keep you in business when you’re closed down.”
The woman was in tears, giving me a big hug.
We got home. At dinner that night, I was like, “What do you think?” She said, “It’s not for me.”
If today wasn’t for you, then this business is definitely not for you. There were no spreadsheets, no broken pipes. But there are parts that I really do love. I love building stuff.
How did you develop The Pointe, the entertainment office building in Burbank?
That’s what we built in 2009. That was a terrible time to build an office building. We opened it up completely empty. No tenants.
How did you get tenants in?
You just gotta wait it out, just like now. You might have to write more checks than you thought to get to the next day. The building is full now. It has Legendary, Fremantle, CBS, Nexstar, the Producers Guild.
Why was the Ranch Lot deal structured so you bought the properties from Warner and leased them back?
Warner came to us and said, “Will you build us a building and sell us the building and the rest of the lot, and you buy the Ranch Lot?” They wanted to be much closer to the main lot.
Originally, they were going to buy the finished building and the lot. That number got pretty big. At the same time, they’re building their project in Hudson Yards [in New York City]. They were worried about being developers again.
They said, “What if you build the buildings and we’ll lease them?” We ended up leasing them two buildings, sold them [Burbank Studios] and bought the Ranch Lot. In 2019, this was all signed up. But they didn’t want to own the property until we finished the two buildings.
During that time, another tenant, an unnamed studio tenant, came to us and asked if we would develop the Ranch Lot for them. But we had to go back and ask Warner; they had a right to match another offer. They accepted it. Now we’re building for them on the Ranch Lot.
Now you’re building 16 soundstages and a 320,000-square-foot office complex at the Ranch Lot.
Yes, 16 stages, a mill, parking garage and office building. Probably the toughest construction loan we’ve ever closed, even with a 15-year lease. Most of these buildings [we built in Burbank] were financed without a tenant.
There’s not a lot of lenders. There’s an office component, which makes it tough. Thankfully we had a long-term lease with a tenant.
What’s it like financing office properties without studios right now?
If you have performing real estate, I think you’re able to work through with your lender on a plan to extend your loan out. But office is very tricky. It’s a capital intensive business. Lenders want to make sure, if they’re going to extend your loan, that you’ve got the resources to make the leases work.
You try not to finance anything right now. Every day a loan comes due, though.
Would you build — or even buy — an office property right now?
You wouldn’t be able to build it because you couldn’t finance it.
We would look at buying if it’s the right product. Everyone has a different philosophy and a lot of people have done much better than we have. But we try to build or buy stuff that we’re going to keep forever. And so that generally means it’s got to be a decent product. You want to hold it forever. Buying stuff and flipping it — it’s a good business. It’s just not one that we typically have been involved with.
We’re in a cycle where people are looking at today. It’s easy to do that, but long term I don’t think it’s the right approach. You’ve got to think about the long term.
I don’t see us doing anything else but real estate, focusing on this kind of entertainment and studio-related parts of it.
What about the film studio sector?
We’re really office driven, but the stage components evolved. We bought our first in 2007.
We have a ton of production-related entities in the portfolio. We can say, “We have your office and stage needs.” The goal for us would be to have your stage need, your production need and your corporate headquarters.
Are you concerned about more competition in studio real estate?
No one is entering this market. There’s a lot of stuff on paper that you’re not going to see. It takes a while to figure out how to design these boxes. A stage is a one-story building. It’s the worst use of land and you can’t park on it.
You partner with a lot of large institutions on deals, like Blackstone and Stockbridge. How have your conversations with them changed, given the shift in interest rates?
It’s a little frustrating for me, because you can’t paint real estate with the same brush. Not all office is a building in Des Moines. You have to get super granular. But when you get really big, you don’t have the luxury of being granular. You have to say, for example, “Office is bad.” Office anywhere? You’re getting some of the highest rents of all-time in Manhattan. So not there?
When they’ve sworn off a product type, it doesn’t matter what I can present or what I can commit, because they’re not doing it.
But the bigger people get it — the quicker they swing in and out of things. I think interest rates coming down lower next year is going to help.
Have regulatory challenges ever deterred you from building?
I sat at a Coastal Commission hearing in Santa Cruz last night until 11 at night, thinking, “Why would I choose to do this?” But when you get the chance to build something, especially with someone like Frank Gehry [in Santa Monica], it’s all worth it.
The commercial real estate industry has been vocal against Measure ULA, the city of Los Angeles’ new transfer taxes. How has that impacted you?
Everyone has a really strong opinion about it. Do we have a problem that needs to be solved? Yes. Is that the way to solve it? I’m not sure. Is it one of the reasons transactions are down? Absolutely. It’s certainly not the cause of the transaction volume change on its own. But it comes up.
In New York last week, people were talking about it. They don’t even know what to call it, or know exactly what it is — but they say, “We’re not doing anything there [in Los Angeles].”
Do you think there needs to be better communication between the real estate industry and politicians?
Last night someone said, “Call yourself an applicant, not a developer. It sounds better.”
It’s so true. I was looking through the last few years of buildings that we’ve done, the amount of fees generated for the cities, the amount of off-site work, the traffic improvements we made. If you aren’t allowing people to build, where is that revenue coming from?
There has got to be a better balance, a middle ground. We haven’t gotten there.