DOWNTOWN LOS ANGELES - Korean Air is considering major changes to its $1 billion plan to replace the aged Wilshire Grand Hotel. Instead of building a 45-story tower with 560 hotel rooms and a second-phase, 60-story office complex, the company is looking at erecting a single tower with 900 hotel rooms and a diminished office component.
The pending changes come as Korean Air has parted ways with office giant Thomas Properties Group, which handled the project’s entitlements and was widely expected to serve as the project developer. Martin Project Management, a new venture by architect Chris Martin (whose firm AC Martin is handling the project designs), has been appointed to manage the development.
Thomas Properties, which was presented in April 2009 as Korean Air’s development partner, had been negotiating to stay on the project. As developer, Thomas Properties would have shared the financial risk, but would also gave maintained an ownership stake in the finished product.
“We’re disappointed that we could not reach an agreement with [Korean Air] to proceed as developer of the project,” company Chairman and CEO Jim Thomas said.
Chris Park, the hotel’s general manager, said Thomas Properties was contracted only to manage the land-use entitlements. While there were considerations to hire the firm as developer, an agreement was never in place, Park said.
The Seoul-based Korean Air, a subsidiary of the shipping magnate Hanjin, still plans to begin tearing down the 1952 hotel this summer and break ground on the new development next year, Martin said.
The approved plans called for a 560-room hotel with about 100 residential units that would open in 2016. The timing of the 60-story, 1.5 million-square-foot office tower has always been dependent on the office market’s recovery.
Update: While specifications for the single tower are still under study, Martin said it would be closer in height to the approved phase two office building. That structure was most recently imagined as a 60-story tower, but the entitlements would allow for a building of 1,250 feet in height, or 75-80 stories. If Korean Air built the tower as tall as its approvals allow, it would surpass U.S. Bank Tower as the tallest building west of the Mississippi River.
The Downtown office vacancy rate was 18.8% in the fourth quarter of 2011, according to a report from Cushman & Wakefield. As a rule of thumb, office experts say that vacancy must sink below 10% to justify new high-rise construction.
With the office market still slumping, Korean Air is now looking to downsize the office component in favor of more hotel rooms, a decision aided by the currently hot Downtown hotel market.
“We don’t want to have a construction site that waits for 10 years while you do hotel, then later office,” Martin said. “We have every intention of doing this as a single-phase project.”
Martin and Korean Air officials are analyzing the new plans, but Martin said the project would be allowed by its entitlements, which were approved by the City Council last year. Any changes would be administrative and would not require City Council approval, he said.
As the entities look to formalize the changes, Martin said the timeline remains largely unaffected. The hotel will be dismantled floor-by-floor, starting at the top, beginning in June, he said (the process will not involve dynamite or wrecking balls). Construction on the new tower would still start next spring and the building would open in 2016, he said. The project would also maintain a small residential component, though the number of units is uncertain, Martin said.
At 900 rooms, the hotel, which does not yet have an operator, would be among Downtown’s largest, but still smaller than the 1,354-room Westin Bonaventure and the 1,001-room J.W. Marriott/Ritz-Carlton.
Korean Air’s plan to double down on its hotel play comes as hospitality has emerged as a key driver of Downtown commercial real estate.
In addition to the Wilshire Grand plan, Williams/Dame Associates plans to break ground this year on a 377-room hotel housing two Marriott brands on Francisco Street. Ace Hotel is planning a 180-room project inside the United Artists Theater building at Broadway and Ninth Street.
In recent years, investors purchased several existing hotel properties, including the LA Downtown Marriott and the former Holiday Inn (now a Luxe brand hotel). Other property owners have looked to capitalize on the trend by putting up for sale holdings such as the Downtown Car Was site and an undeveloped plot at 11th Street and Grand Avenue, marketing them toward hotel investors
In one way, the Koran Air proposal is a wash. The 900 hotel rooms would result in a small increase in beds compared to the Wilshire Grand’s 896 rooms. The hotel closed in December.
Given the Downtown office market’s high vacancy rate, industry observers may not have needed a crystal ball to foresee Korean Air’s decision to abandon plans to build a 1.5 million-square-foot office tower. It is uncertain how much office space would be included in the new plan. Martin said the concept is to locate the office space on lower floors, above a commercial/retail component. Hotel rooms would go on top.
If the office market is so dismal, some might wonder why the developers would not abandon office space all together. Martin said doing so would be to miss an opportunity.
“The very worst thing for Los Angeles and for the owner would be to build a very large office building without any tenants,” Martin said. “The second worst thing would be to build this project without an office component because of its location on top of transit, with all this density and capacity.”
Steve Marcussen, a Downtown broker and executive director of Cushman & Wakefield, said the office market appears to be in early stage of a recovery. Vacancy may be high, but it has stopped rising. He also said the most of the market’s vacancy is concentrated in a few distressed properties.
Given the three- to five-year construction timeframe for a high-rise, betting on new office space today, Marcussen said, is “not as farfetched as people say.”
Contact Ryan Vaillancourt at firstname.lastname@example.org.