U.S. Bank Tower The U.S. Bank Tower is a 72-story office tower in Downtown LA. It stands 1,108 feet tall, making it the second tallest in Los Angeles. Movies such as Independence Day, Terminator 2: Judgment Day, Rush Hour, The Day After Tomorrow, Beverly Hills Cop, and Predator 2 were filmed at the iconic tower. The largest tenants occupying the 1.43 million-square-foot building include U.S. Bank, which is the fifth largest commercial bank in the United States, Thomson Reuters, Lewis Brisbois Bisgaard & Smith LLP, and Marsh USA. It also includes an upscale restaurant on the 71st floor at 71Above, where residents, professionals, and tourists can enjoy fine dining and drinks while experiencing panoramic views of the Los Angeles skyline.
In July of 2020, Silverstein Properties acquired the 32-year old iconic building for $430 million which was described as “one of the biggest pandemic-driven steals of 2020,” according to Commercial Observer. Silverstein Properties is a 64-year-old vertically-integrated real estate company founded by Chairman, Larry Silverstein. The firm has developed, owned, and managed more than 40 million square feet of commercial real estate properties across the United States and is best known for the redevelopment of the World Trade Center complex (at 7, 4, 3, 2, and now 5 World Trade Center).
The U.S. Bank Tower was originally developed by Maguire Properties, who purchased the air rights above the neighboring Los Angeles Central Library, which was ravaged by a fire in 1986.
It was coined the largest library fire in American history to date which led to more than 1.1 million books being destroyed and damaged, causing $22 million in damages (equivalent to $50 million today), and required the efforts of hundreds of firefighters. The mystery of what sparked the fire still remains unsolved.
In 1989, Maguire Partners helped prevent the demolition of the historic library by restoring its structure, while developing a 75-story super-tall directly adjacent to it. Without overpowering the library, Henry N. Cobb designed the tower with combined circular and distinct square-like columns with a total of four setbacks. At the top of the tower lies a crown that shines like a beacon in the night. And, unlike buildings in New York City, the roof is flat to function as a helipad for helicopter landings. The building was also designed to withstand earthquakes with magnitudes of 8.3 or greater. In total, the total project costs that Maguire Partners spent to develop the tower was $350 million.
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Since 2015, the previous owner, OUE Limited, spent $50 million for the buildout of 70Above, Skyspace, and Skyslide. Skyspace included 2 observation decks with 360-degree views of Los Angeles located on floors 69 and 70, while Skyslide was a 45-foot-long glass-encompassed slide attached to the outside of the building that was situated 1,000 feet above ground. As part of Silverstein Properties’ “comprehensive capital improvement program” to create a creative office environment for their tenants, Skyslide and the observation deck are permanently closed to be replaced with leasable office space.
Jeremy Moss, Executive Vice President and Director of Leasing for Silverstein Properties, viewed the tourist attraction component as having a negative impact on the workplace environment for the tenants. In the late eighties, the original developers, Maguire Partners, only viewed the top floors of the supertall as an appeal to elite corporate clients who may not have favored sharing the building with tourists. But the Singaporean-based investment management firm, OUE, who successfully boosted occupancy from 50% to 75% from 2013 to 2015, wanted to increase the building’s appeal by attracting visitors. Unfortunately, the observation deck in the U.S. Bank Tower failed to bring in the masses.
Instead, Silverstein Properties plans to invest $60 million on its repositioning plan with the vision to produce a “a creative office campus in a vertical urban environment” to participate in the “transform(ation of LA) into a 24/7 community…..much like lower Manhattan,” says Larry Silverstein. The renovation plan is targeting 35,000 square feet of common area space on the ground and 54th floor, along with new destination dispatch elevators and an upgraded gym and parking garage. The ground floor will sport a new cabana-style look in the redesign efforts of the main entrance and lobby.
It will also include a day-to-night juice and cocktail bar, a fast casual restaurant called Market Creations, which supplanted the former Chinese restaurant, in addition to patio seating. Silverstein Properties’ multipronged revamping strategy is expected to be completed by the end of 2022.
Located on the 54th floor, where workers change elevators to get to the higher floors, Silverstein Properties plans on converting the area into an “amenity destination” known as The Vista. It will feature an open coworking lounge with workstations, a bar, fireplace, grab-and-go coffee, and a full-service kitchen. The amenitized lounge is likened to the former Skyspace attracting tourists, but now serves its tenants in a relaxing environment combined with exhilarating, panoramic views of Los Angeles. In total, The Vista will boast 15,000 square feet of hospitality-driven amenity space.
The last element of the program will include Silverstein’s INSPIRE Your Day, a mobile app that helps tenants maximize their workday along with their social, mental, and physical wellbeing. The app will allow tenants to participate in yoga classes, happy hours, culinary classes, lectures, and massage therapy sessions, while taking advantage of discounts and perks in Downtown Los Angeles’ nearby attractions. INSPIRE gives the tenant access to utilize the most out of what the iconic tower has to offer.
The ambitious comprehensive capital improvement plan is representative of Silverstein’s bet and bullish outlook on the Los Angeles market. Downtown Los Angeles’ (DTLA) office market struggled to regain its footing prior to the pandemic. Vacancies reached 19.3% in the third quarter of 2019. The economic slowdown led to business closures and as a result of work-from-home protocols, vacancies reached 22.4% and 25.0% in the third quarter of 2020 and 2021, respectively, according to Cushman & Wakefield’s Marketbeat reports. Comparatively, Manhattan’s vacancies have never climbed past 10% from 2015 through 2019. But unlike DTLA, New York City experienced a larger downfall from a vacancy of 10.9% in the third quarter of 2019, to 13.3% and 19.0% in the same quarter of 2020 and 2021, respectively. Both cities have yet to report positive year-to-date absorption rates in 2020 and 2021.
The positive outlook of the DTLA office market is the affordability and consistent asking rent of $45 per square foot for the past three years. New York City’s asking rent is almost $30 per square foot higher at $70-$74+ asking rent. But a trend was emerging during the end of 2018 and beginning of 2019: Globe Street reported that 42% of office tenants occupying space in DTLA came from creative users such as architecture and tech-driven creative firms.
New lease signings pushed Class A rates to almost 5% entirely, as a result.
DTLA is known for offices home to many large financial service firms and banks but in 2019, this user type only comprised 57% of DTLA’s tenant mix; tech, engineering, design, and marketing companies comprise the remaining 43%. This trend is echoed to resume when the pandemic is behind us. But as many businesses still have not returned to the office, younger workers have expressed an affinity to return to the workplace. According to an Eden Workplace survey, 9 out of 10 Millennials prefer to return to the office.
Despite high availability rates, the 32-year-old tower is positioned to recover due to the proliferation of the downtown Arts District attracting music labels, tech companies, and social clubs. An area that was once home to renowned rock bands Nirvana and the Red Hot Chili Peppers is now occupied by WeWork, Warner Music Group, and Spotify. Spotify occupies space at One California Plaza, which is one block north of the U.S. Bank Tower.
As of 2020, the skyscraper is 89.7% occupied with an asking rent of $25.20 per square foot. The Library Tower’s asking rent ranges from $45.60 through $51 per square foot and is 78% leased, comparatively. But its competitor sits only 577 feet high across 42 stories and with just over one million square feet of total space. Its neighbor, Two California Plaza, stands 750 feet tall across 52 stories and with nearly 1.3 million square feet of space. The asking rent is $46.20 with a December 2016 (last-reported) occupancy of 70%. The Library Tower also faces competition against other DTLA high-rises, Santa Monica’s creative office buildings that are converted warehouse projects, and Hollywood’s purpose-built creative office campuses, which is home to the largest entertainment companies and new tech-driven (“techtainment”) companies.
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The road to recovery is still uncertain. As of April of 2021, CBRE predicts that office will recover in 2023; but the anticipated post-Labor Day comeback did not materialize. Only 20% of restaurants were open in the CBD in the third quarter. LA’s recovery relies on workers returning to the office—first and foremost—and employment figures to improve. The county’s third quarter unemployment rates in 2019, 2020, and 2021 were 4.5%, climbed up to 17.0%, and dropped down to 8.2%, respectively.
Despite significant headwinds, the real estate professionals remain steadfast in that the “creative economy” will be the impetus for LA’s Covid recovery in the long run. According to CBRE, there are 17 million workers who work in the creative industries in the United States—these industries include technology but are weighted more towards media and other forms of creative content. Of those, New York and LA dominate the industry with more than 1.3 million and 1 million creative workers, respectively; yet the LA metropolitan area occupies the largest amount of space (130 million square feet) in the country.
But Silverstein Properties took a contrarian view of the struggling LA office market as a small setback in the near term, with favorable demand drivers in the growing creative economy in the longer term. But the firm also acquired the building at a reported 34% discount. Multiple sources mention that OUE Limited valued the building between $633 and $650 million in its latest report in 2020; Silverstein acquired the tower for $430 million. 55% was financed through the Tel Aviv Stock Exchange at an interest rate of Libor plus 3.4% (unconfirmed).
Considering OUE’s purchase price of $357.5 million in the beginning of 2013 (at an initial 50% occupancy rate, which ramped up to 75% in 2015), while taking the lowest average rent of $45 per square foot of 1.4 million rentable square feet; when including the $50 million capital expenditure costs in 2015 to develop Skyslide, Skyspace, and 71Above, with an exit price of $430 million in 2020, the unlevered rate of return is 13.6%.
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OUE technically would not have lost money, but selling it for $650 million would have increased their returns to 18.3% unlevered—this back-of-the-envelope calculation does not include pertinent tenant improvement allowance and other capital expenditures needed to upkeep the building.
At a $430 million acquisition price, Commercial Observer described the deal as “one of the biggest pandemic-driven steals of 2020.”
During a time when acquiring supertalls at a discount in New York City were expected, but nonexistent.
As office trends are rapidly changing to a more flexible and collaborative workspace with buildings that are highly amenitized to attract the Millennial and Gen Z demographic; who prefer a less formal dress code, healthier on-the-go lunch options, and favoring a more inviting workplace while having the option to bring their pets to work, landlords have been quick to respond to these trends to remain competitive.
From permanently closing Skyspace and Skyslide, to the maximization and creation of new amenity-driven spaces; and from utilizing tech through the INSPIRE Your Day phone app, to the redesign overhaul to transform the building’s lobby from a corporate office dynamic to a relaxing cabana-style environment, Silverstein Properties wants every tenant and prospective tenant to know that every detail and feature was made for them.
The New York City-based real estate development and investment firm is betting on capturing the demand generated from creative types of companies, along with the synergy between DTLA and the Arts District. The tower’s competitor, One California Plaza is nearly at 90% occupancy and while it is forecasted that LA’s recovery is to occur sometime in 2023, The iconic Library Tower is positioned to boost its occupancy levels well above its current 78% rate.
In conclusion, as Lisa Silverstein, Vice Chairman of Silverstein Properties predicts, she has no reason to believe that “once the pandemic is behind us, we will see the return of dynamic job growth, Millennial and Gen Z population growth and residential migration into Downtown.” And, only time will reveal how the Angelenos will respond to arguably the first office tower to sport a “world’s leading boutique hotel (feel),” according to Jeremey Moss, and to compete against other vertical and horizontal creative office skyscrapers and campuses in the most vibrant city in the U.S.
U.S. Bank Tower Written by NYU Real Estate Student Joe Chung
