Project Case Study: Skypark (January 2006)

OVERFLOW FROM 01-06. NEW STUFF BELOW.

COMPANIES

A joint venture of Paric Corp. and Barton Malow Co. is building the $75 million, five-story, 180,000 square foot, 72-bed Progress West HealthCare Center on 48 acres in O’Fallon, Mo. St. Louis-based Paric and Southfield, Mich.-based Barton Malow say the project will be completed next year. St. Louis-based HOK is the project architect… Minneapolis-based Kraus-Anderson Construction Co. is expected to close by early this year on the acquisition of Phoenix-based Summit Builders… West Georgia Health System has selected the Atlanta office of McCarthy Building Cos. as the construction manager, the Washington office of Ellerbe Becket as the project architect and KLMK Group of Richmond, Va., as the program manager for the first phase of a $60 million expansion and renovation program. They will team with design and planning firms Morell & Associates of Northbrook, Ill., and Engberg Anderson Design Partnership Inc. of Milwaukee, who have worked out a planning and programming system for the project… Kaiser Permanente has selected Helmuth Obata and Kassabaum to be the architect for a new $200 million, 212-bed replacement hospital and parking structure in Redwood City, Calif…. Ernst & Ernst Building Contractors won two first place awards for construction excellence, including one for the Tri-County Eye Physicians & Surgeons Ambulatory Surgery Center (ASC) in Southampton, Pa. The work included the construction of a two-story, 12,000 square foot ASC and the renovation of an 8,000 square foot ophthalmology center. The awards were given by the Southeast Pennsylvania Chapter of the Associated Builders & Contractors Inc. (ABC), a national association for the construction industry.

MOB conversion rejuvenates office park

PROXIMITY TO HOSPITAL, AMENITIES ARE KEYS TO SUCCESS FOR CALIFORNIA ASSET

By Jessica Griffith

Skypark Office & Medical Center in Torrance, Calif., is perfectly suited to house healthcare tenants. Located across the street from Torrance Memorial Medical Center, the office park with 425,000 square feet of space is filled with water features, restaurants and other amenities.

But, when Continental Development Corp. began its due diligence on the property, the vacancy rate hovered around 30 percent and few of the tenants were in the medical field.

“We knew we would contemplate some medical renovation, but in our underwriting process we were surprised by the depth of demand for Class A medical office space,” says Robert Tarnofsky, director of real estate for Continental Development, a real estate firm in El Segundo, Calif.

A weak office market in Torrance further influenced the company’s decision to increase medical space at Skypark. The park is a 15- to 20-minute drive from the nearest freeway and is bounded by four city streets, so it is not the first choice for office tenants who need immediate freeway access.

Medical makes sense

The combination of strong medical office demand and limited interest in general office encouraged Continental to transform some of the buildings into medical offices. The project is ongoing, but Tarnofsky expects at least 125,000 square feet to be converted into medical space, or close to one-third of the park.

Skypark was developed in phases between 1981 and 1986 and its 22 acres are landscaped with ponds, waterfalls and other park-like features. Nine office buildings are scattered around the L-shaped property, and in addition to office space, the park is home to Olive Garden and TGI Friday’s restaurants, a hair salon, a deli, banks, a travel agency and a pharmacy.

“This is a product type that is unique to the area, and we were intrigued by the aesthetic of the property and the potential it held,” Mr. Tarnofsky says. “To some extent, we felt the previous owners, who were institutional, were not as hands-on as Skypark demanded. We felt we could be very hands-on and effect some change in composition.”

Continental purchased Skypark from Irving, Texas-based Archon Group for a reported $42.5 million.

Skypark is a management-intensive project, in part because it has more than 100 tenants, many of which are small and rent between 1,000 square feet and 2,500 square feet.

Changes abound

The transformation from general office to medical office first required additional parking. Because medical tenants generate a high number of visitors, MOBs generally need 60 to 70 percent more parking than traditional offices.

Skypark has a parking structure and multiple lots around the perimeter of the property, totaling about 1,400 spaces.

“The key was to reconfigure the surface lots,” Mr. Tarnofsky says. “We analyzed the efficiency of the parking and by changing the layout and renovating the landscaping, we were able to add about 375 stalls.”

Inside the buildings, Continental is gutting lobbies, restrooms and other common areas and renovating them; three buildings were complete as of late November and others are in planning stages. Several buildings also were remodeled to add gurney-sized elevators for medical tenants.

“We are still trying to make the final determinations as to the full extent of what we will convert,” Mr. Tarnofsky says.

Another change in the park is the wayfinding system. Many of the buildings in Skypark are of a similar design and the layout does not feature a grid or right angles, making it difficult for visitors to find their destinations. This is not a significant problem in a general office development, but medical offices attract a large number of patients and many visit infrequently, meaning they may not have a chance to learn their way around the park.

Occupancy skyrockets

With the improvements and repositioning at Skypark, Continental has raised the occupancy rate from 70 percent to more than 90 percent.

Prior to Continental’s purchase of the property, the space was divided into about 70 percent office, 20 percent medical and 10 percent retail and restaurants. Now, the mix has changed to 75 percent medical and 15 percent office.

“We’ve been surprised at the amount of absorption,” Mr. Tarnofsky says. “The hospital recently went through an expansion and being adjacent to the hospital is to our advantage.”

“We certainly have more interest in the suites than we have suites available,” says Dave Smith, a first vice president with CB Richard Ellis in Torrance and one of the leasing agents for the property.

He says several factors contribute to the demand.

Torrance Memorial officials continually develop new relationships with doctors and physician groups who then want to locate near the hospital. Some practices are consolidating, while other doctors are starting independent practices.

“A lot of medical practices and independent physicians have been in the same facilities for a long time and they are realizing the quality and efficiency of this space,” Mr. Smith says.

Continental does not plan to transform the entire property into medical office space and Mr. Tarnofsky says Skypark always will have general office tenants.

Even though the site has room for additional buildings, there are no current plans for an expansion. If Continental were to add space, Mr. Smith says, the new buildings likely would house amenities for tenants such as shops and restaurants.

Mr. Smith says construction costs and parking may limit the options for medical office expansion in Skypark.

“The rents that would need to be achievable for expansion are probably not achievable,” he says. q

Jessica Griffith is a business writer specializing in commercial real estate.

Skypark Office & Medical Center

TORRANCE, CALIF.

STATS

• 425,000 square feet, nine buildings

• 22-acre site

PLAYERS

• Owner: Continental Development Corp.

• Leasing agents: Dave Smith and Timothy Vaughan of CB Richard Ellis, Torrance, Calif.

• Architect, exteriors and common areas: Bryant Palmer Soto Inc., Torrance, Calif.

• Architect, interiors: Shlemmer+Algaze+Associates, Culver City, Calif.

• General contractor: 2H Construction, Long Beach, Calif.