ELIZABETH HAYES
Staff Reporter
It was a busy year for real estate professionals in 1998, as demand outpaced supply for most types of property in most areas of Los Angeles County. It was also a wild ride, as global crises and Wall Street gyrations impacted local property markets.
General tightness in the real estate sector prompted developers to break ground on several major speculative projects, a type of activity that had virtually disappeared for a decade.
“We’re just starting to mature into a development phase,” said John Long, managing partner of Highridge Partners, which is developing an office building in El Segundo.
One of the hottest spots has been Santa Monica, where several major projects are underway, the largest of which is the Water Garden’s long-awaited second phase. A few miles south, preliminary work has begun on the residential portion of Playa Vista, and DreamWorks SKG’s studio project looms. Meanwhile, conversions of old Westside warehouses into office space keep rolling along.
Downtown, Staples Center is quickly taking shape, ground has been broken on the Cathedral of Our Lady of the Angels, and the Disney Concert Hall is moving ever nearer to construction. In the Tri-Cities, almost 900,000 square feet of new offices are either under construction or just completed.
Then there’s Hollywood, where a spate of retail development is just getting underway, with TrizecHahn Development Corp.’s Hollywood & Highland project leading the area’s revival.
Mike Rago, area manager of research services at Cushman & Wakefield Inc., said all this might sound like a lot, but it isn’t really that much to absorb.
As of year end, there was 2.4 million square feet of new office space under construction in Los Angeles County, which upon its completion will only increase the county’s pre-existing 160 million-square-foot inventory by about 1.5 percent.
But the activity is not confined to the commercial sector. Persistently low mortgage interest rates and robust job growth continue to fuel the local housing market. That has driven housing construction in outlying areas, such as Santa Clarita and the Antelope Valley, as well as in urban areas like Pico Rivera. Meanwhile, Realtors have had their hands full, with several agents each selling hundreds of homes in 1998 alone.
But the times have not been uniformly positive for those who make their living by acquiring, selling and developing real estate.
Many of the once-high-flying real estate investment trusts saw their share prices head south as turmoil hit the capital markets, constricting the capital spigot. That disruption occurred as investors, spooked by the global financial crisis, bailed out of commercial mortgage-backed securities for lower-risk investments.
Despite those short-lived concerns, and fewer bargain-priced properties available for sale, REITs still posted a solid year in 1998.
The strongest proof of that is Arden Realty Inc., a REIT that was the largest investor in L.A.-area real estate last year. Arden acquired $447.7 million in 1998, most of it in the first six months of the year.
Acquisition activity wasn’t limited to REITs. Douglas Emmett & Co., which advises institutional investors, was the second-largest investor, with $209.5 million worth of local acquisitions.
“The market started out on a straight line upward, with REITs the most active buyers and entrepreneurial, value-added (investors) right behind and pension funds right there,” said Bob Safai, a partner at brokerage firm Madison Partners who brokered the most investment deals in Los Angeles County last year. “The market hit the all-time highest level of the ’90s last year and adjusted itself accordingly when the (commercial mortgage-backed securities) debacle took place.”
Another trend has been the increasing sensitivity to global events. The Asian financial crisis caused the volume of imports into Los Angeles to soar, due to the enhanced purchasing power of the U.S. dollar overseas.
And that flood of imports, in turn, has created tremendous demand for warehouse space, particularly in the South Bay. Industrial vacancy rates in certain parts of the county have sunk to below 5 percent. In response, developers like Catellus and Koll have undertaken massive industrial projects.
“We’re seeing a lot of entitlement and development of industrial and retail,” said Jerold Neuman, a real estate and land use attorney at Allen, Matkins, Leck, Gamble & Mallory LP. “We’re seeing a tremendous amount of eyeing of properties that will be important for the logistics industry. It’ll coordinate with the Alameda Corridor and expansion of Los Angeles International Airport.”
The Asian crisis has also served as motivation for Japanese investors to unload L.A. trophy properties they had bought in 1980s. Bidders for such assets have been plentiful, and the deals have enriched several local brokers and attorneys.
Wall Street also had profound influences on the L.A. commercial real estate market in 1998, both positive and negative. The stock market fueled consumer confidence and, in turn, boosted the local residential and commercial real estate markets.
And by late in the third quarter, turbulence in the capital markets had begun to subside.
“Despite the financial earthquake that struck the capital markets in the third and fourth quarter, it was a phenomenal year for real estate finance in Southern California and in particular, L.A.,” said Arthur Schwartz, director at mortgage banking firm Holliday Fenoglio Fowler LP’s office in Encino. “Securitized lending players have definitely returned en masse and are very eager to continue lending.”
But the capital market turmoil late last year has made lenders more cautious than before and caused some developers to back off a bit. Some have called the concerns a positive factor that will help prevent the market from overheating. “It will prolong this positive real estate cycle because we won’t have the factor of significant overbuilding,” Rosenthal said.
