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Arden and Lowe ready for takeoff at Hughes center

More than 57 years after Howard Hughes Jr. bought a 70-acre tract in west Los Angeles to serve as a protective flight path for aircraft, Arden Realty Inc. is hoping its plans for the property's remaining undeveloped land will take off.

The Los Angeles-based REIT recently purchased the remaining 34 acres of undeveloped commercial property at the site from Howard Hughes Properties LP. Arden has big plans for the tract situated two miles north of Los Angeles International Airport and adjacent to the 405 (or San Diego) Freeway. With the healthy Southern California real estate market, Arden feels now is the time to kick off development.

The REIT, which has partnered with Lowe Enterprises to develop at Howard Hughes Center, has entitlements for 1.3 million sq. ft. of additional office and for 600 hotel rooms. (The center already is home to three office buildings and The Spectrum Executive Health Club.)

Arden and Lowe will kick off a 247,000 sq. ft. speculative office building Jan. 15 on the site and are marketing build-to-suit sites ranging from 75,000 to 335,000 sq. ft. Also, four hotel chains are interested in the two hotel sites at Howard Hughes Center, Arden Vice President Mike Russell says. One hotel likely will be an all-suites format and the other an upper-end, extended stay format.

Meanwhile, J.H. Snyder Co. is developing The Entertainment Plaza at Howard Hughes Center, a 250,000 sq. ft. retail center scheduled to open in November 1999. With the potential for more than 1 million sq. ft. of office, Arden says Howard Hughes Center is the largest and most unique project com ing on line in the Los Angeles office market.

Arden bought the remaining undeveloped commercial property at Howard Hughes Center, along with Spectrum health club, on March 31, 1998 for $38.5 million. (Hughes paid $13,000 for the entire tract in 1941.)

Even as development slows in part of the country, President and Chief Operating Officer Victor J. Coleman says now is the time to build at Howard Hughes Center. "We feel in this market, our timing couldn't be better," he says. "The first spec building fills a tremendous need in the Westside office market - a market in which there is very low vacancy, strong job growth and no large blocks of available space."

He adds that west L.A.'s vacancy rate has tightened to 10% in the past nine months while rental rates have jumped about 17%. Coleman also believes that DreamWorks' recent agreement with Playa Vista to build a new headquarters in the west Los Angeles area enhances his own company's position.

Lowe Enterprises Commercial Group Senior Vice President Richard G. Newman Jr. says the spec office building will be part of a project unique to west L.A. "The intent of the design and development is to create that suburban-campus atmosphere in what is an urban setting," he says. "It's highly unusual in Los Angeles to have a development that's so complete."

The campus environment at Howard Hughes Center will emphasize pedestrian activity. The landscaping will include more than 20 acres of gardens, courtyards, water features and open-plaza areas. The master-plan designer for Howard Hughes Center is Costa Mesa, Calif.-based McLarand, Vasquez & Partners. Sausalito, Calif.-based SWA Group is the landscape architect.

Howard Hughes Center is a significant venture for Arden, the largest public owner of office space in Southern California. It marks the REIT's first foray into the development business. "Our intent is to selectively develop in markets in which we see sustained demand and in which we already have a significant presence," he offers. "We are certainly in a position to seize opportunities as we find them, but development is just one area of growth for us."

Developing spec office space will allow Arden to dip into a new source of returns. Until now, Arden had focused on growing by acquisition, and it grew quickly. The REIT owns 250 buildings comprising 18 million sq. ft. in 45 submarkets in Southern California.

However, with the dramatic drops in the price of REIT stocks, many REITs - including Arden - have been pushed to the sidelines in the acquisition game as private funds pick up the slack.

"Clearly, Arden will not be relying solely on acquisitions to provide revenue and shareholder value," Coleman says. "For us, the future will be a very deliberate balance of pursuing worthwhile commercial real estate investments, viable development projects, renovations and internal growth programs. The Howard Hughes Center is a significant component of our strategic plan, as are some of our major redevelopment and renovation projects."

Arden's Howard Hughes purchase involved some good fortune, Chief Financial Officer Diana Laing believes. "We feel like we lucked into this purchase," she says. Arden got lucky, she adds, because Hughes Properties originally marketed the development rights at Howard Hughes Center on a piecemeal basis. But when Arden saw the opportunity the entire tract offered, the REIT took a chance.

"We did - in a lark - say we'd buy the whole thing," Laing recalls. "We lobbed an offer out there for the whole thing, and they said, 'OK.'"

With all 34 acres of undeveloped commercial property secured, Arden next focused on finding a development partner. Going into its first development venture, the REIT sought out a partner with a similar culture, and it found Lowe Enterprises.

"Arden has had an excellent relationship with Lowe for many years. That relationship, coupled with Lowe's record of accomplishment and expertise, made them an ideal partner," Coleman says. "Both firms have over 25 years in this market, similar business philosophies and complementary in-house capabilities. We also have long-term relationships with subcontractors and the community."

Russell echoes Coleman's thoughts, adding that Lowe's ability to develop several product types is a plus. "Our cultures match," Russell says. "It's been a good marriage."

Lowe's Newman says his company will make an equity investment in Howard Hughes Center.

Arden and Lowe soon will learn whether their partnership will succeed. The partners' first venture at Howard Hughes Center, the spec office building, should be ready for occupancy in the first quarter of 2000. Also, Newman says he is confident the Arden/Lowe team will attract a build-to-suit tenant to Howard Hughes Center.

As for the spec building, those charged with filling it with tenants also are confident. Michael A. Pollack, director of leasing for Howard Hughes Center, says the spec building will not have to compete against three other buildings currently under construction in west L.A. because they'll likely be leased before the Arden/Lowe project opens. "We think the timing is great," he says. "The buildings under construction now are just starting to fill. We're not running scared."

Robert C. Peddicord, Arden's senior vice president for leasing, agrees. "There's a lot of pent-up demand in L.A. now," he adds. "Howard Hughes Center is in our back yard; nobody knows this market better than us."

Moreover, Arden says the center is the only development of its kind in L.A. to have its own ramps to the freeway.

Arden is marketing space in the spec building to companies in high-growth industries such as entertainment and high-tech, Pollack says. Meanwhile, he says, excitement is building for the project. "The center's really been a sleeping giant," Pollack says. "The response has been, 'Finally!' "

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