While most large cities experienced a significant pullback in demand for commercial space due to the pandemic, we’ve been fortunate that a major fund focus has been on a particular sub-market of LA, namely the West Jefferson neighborhood. This area has been an outlier during the pandemic, with demand for commercial space (and even office space) increasing over the past 18+ months. This is largely due to demand from companies such as Apple, Amazon, HBO, and Netflix, which are all locating various portions of their in-house production and streaming service groups in or around West Jefferson. Additionally, we’ve seen that our assets, being largely low-rise single-tenant spaces, have become increasingly attractive in a post-Covid world with many companies adopting a more remote-friendly working model and having an aversion to larger, denser, traditional office buildings.
We believe that the unique requirements of investing through an Opportunity Zone Fund have been a key benefit to our development of the area. Specifically, our 10-year investment horizon and our need and willingness to invest heavily in improving properties has allowed us to attract extremely high quality, big name tenants that have the potential to drive enormous value for the portfolio over time.
We’ve also continued to generate modest levels of income through various short-term leases that help reduce the costs associated with “carrying” the fund’s buildings before redevelopment.
As stated previously, we will continue to focus on maximizing long-term value by being patient and advancing our business plans in accordance with OZ regulations. We expect that once a majority of the projects reach stabilization, we will be able to evaluate bringing on moderate leverage which could be used both for various tax payment milestones as well as for additional acquisitions.
Notable asset-level updates
Mixed-use developments
Both of our mixed-used redevelopments, which together comprise an entire block, completed demolition and have interior and exterior improvements currently underway. We’re in the process of negotiating lease agreements with potential tenants and have received signed letters of intent (LOIs) from several groups. We’ve also chosen to make several additional changes to the design, namely improving the visibility and curb appeal of the facade and splitting up some of the larger space into smaller sub 2000 square foot spaces to accommodate a more diverse mix of uses.
Additionally, because of the long lead times (often more than a year), we preemptively applied for and have successfully obtained an ABC alcohol license which should help us expedite the build-out and delivery process for any future restaurant or food service user.
Ground-up creative office development
We expect to receive permits in the second quarter of next year for our largest acquisition, another commercial renovation on West Jefferson Boulevard. The above rendering represents our current design for a ground-up creative office. In addition to the new office space, we intend to construct underground parking which should make for more convenient commuting and bring increased traffic to the West Jefferson neighborhood, boosting demand for our properties and neighboring projects. Parking is scarce on the block and, over time, is something we believe will continue to become more and more valuable. Given the size of the project, building underground parking is more cost-effective than it would be for some of our smaller projects, and we believe it will drive value for the fund’s holdings on the block.
We also plan to construct the office project using Type V materials, which should create a large advantage. With lumber commodity pricing down from an all-time high earlier this summer, we intend to move forward with a wood frame product as this not only allows us to maximize floor space but it is also potentially 30-50% more cost-effective than other construction types.
Creative office redevelopment
We’ve submitted our initial plans for the change of use of our creative office redevelopment and expect to begin construction in the first half of 2022, after we receive fully-approved permits. We are currently marketing the project to potential office users seeking 5,000 to 12,000 square feet and have built flexibility into the initial plans which could allow us to alter the space based on the interest we receive from potential tenants.
During the permitting process, we’ve capitalized on an intermediate means of income with a major network that’s paid to use our building for storage as they film nearby. While this is not the long-term plan, this income helps offset and pay for some of our development carry costs.
Looking ahead
Although the pandemic caused some delays in our redevelopment timelines, we believe that its impact more broadly on the streaming content and entertainment industries may end up being a benefit to our broader investment thesis.
As long-time proponents for West Jefferson’s revitalization, we’ve invested in several non-OZ projects along the same boulevard. Two neighboring non-OZ projects have recently signed leases with both a production company for streaming content and an advertising agency which, along with interest we’ve garnered from major studios, is further evidence of the entertainment industry’s expansion into this specific submarket and overall momentum for West Jefferson’s growing demand.
Stink Films will be leasing our property catty-corner to our block of the Opportunity Fund’s commercial renovations while Mother, which signed our biggest lease agreement to-date for a West Jefferson property, will be moving across the street.
As always, we will continue to update you as progress is made across the portfolio.