For the benefit of casual industry observers who may have lost count, the acquisition of Trizec Properties and Trizec Canada by a joint venture between Brookfield Properties and the Blackstone Group two weeks ago is the most recent transaction in a series of super-sized real estate company consolidations that represents an aggregate value of more than $30 billion since June 2005.
The acquisition of Trizec, which collectively owns 61 premier office properties totaling 36 million square feet with an estimated value of $8.9 billion, is the latest gesture by institutional investors who continue to view major metropolitan markets, including Los Angeles, through an optimistic lens. In fact, the Trizec transaction represents a public company trifecta for Blackstone’s real estate group this year alone, immediately preceded by the acquisition of CarrAmerica in March and La Quinta Hotels in January. A number of other well-known industry players have made similar bets across multiple property sectors.
Industrial space giant ProLogis, for example, gobbled up Catellus buildings and land holdings for stock and cash valued at $5.5 billion to become the world’s largest network of distribution facilities and services. Similarly, GE Real Estate paid $3.2 billion in cash for Los Angeles-based Arden Realty’s office portfolio, and Public Storage expanded its self-storage platform by acquiring Shurgard at a cost of $5 billion.
Given the recent acceleration of large transactions, and unprecedented purchase prices generally enjoyed by sellers, there is a common perception that textbook investment fundamentals have been abandoned by investors who have an abundance of excess capital. This sentiment is corroborated by the fact that real estate, a normally conservative asset class with historical weighted average price appreciation in the range of 6 percent to 8 percent, has boasted double-digit price appreciation for each of the last several years in Los Angeles.
Additionally, with our industry enjoying the 13th consecutive year of positive growth when real estate cycles historically have shorter duration, the confluence of these and other less significant circumstances has led many industry observers and participants alike to believe that real estate may have reached, or is rapidly approaching, the high-water mark for some property sectors as well as in numerous markets, including Los Angeles, and that the infamous bubble may be about to burst.
While it is tempting to simply retreat to the prevailing explanation that this continuous, high velocity and seemingly endless wave of trading activity reflects the intersection of irresponsible bull market capital advisors who have deep pockets of money which must be either invested or returned to clients, and bearish sellers who are finally nervous that their window of opportunity may be closing, others suggest that additional factors may be at work.
Long term
An alternative school of thought professes to believe that institutional buyers are more disciplined than ever and that with limited exception, real estate underwriting fundamentals are alive and well. Further, mega deals such as the ones mentioned strongly suggest that “smart money” believes in the long-term viability and profitability of the industry, and these property sectors specifically. Otherwise, investors would continue with the more conventional methodology of cherry picking single investment or smaller property portfolio acquisitions within targeted property sector and geographic markets.
Industry optimists and cynics also weighed-in regarding the acquisition of Trizec. In this regard, some analysts maintain that Brookfield/Blackstone overpaid for Trizec stock. Others argue that the resultant benefit of the transaction, including the acquisition of a proven operating platform, has greater value than aggregating individual assets over time. Additionally, consolidations such as this provide an efficient mechanism to significantly increase market share and to gain immediate access to new markets.
Regardless of who proves to be correct, all indicators suggest that the institutional appetite for real estate will continue as long as the strategic and economic benefits derived from consolidation are thought to exist within targeted firms.
So what does all this mean for Greater Los Angeles? Whatever the motivation, ongoing acquisitions by large investors involve sizable efforts to forecast, research and conduct thorough due-diligence to make prudent, long-term real estate investments within target markets. These significant expenditures of time and resources should reassure local real estate stakeholders, users and service providers.
Practically speaking, with respect to the purchase of Trizec real estate holdings in Los Angeles by the new Brookfield/Blackstone ownership entity, we suspect very little will change aside from ownership. In fact, that the joint venture will likely maintain the status quo and generally govern with a laissez-faire, “hands-off” attitude. Unlike with many mergers where a core benefit results from operational efficiencies gained by eliminating duplicate functions, the responsibility of managing the new Brookfield/Blackstone property portfolio in Los Angeles will be divided between the two firms. Given that Canadian-based Brookfield currently has no California presence, and that some portion of the purchase price paid to Trizec is presumably based upon the strength and value of Trizec’s existing operating platform, expect business will continue as usual.
Despite the usual skeptics, Angelenos should derive comfort from the fact that at least one well-respected Wall Street player believes that there are good times ahead.
William E. Whitlow and John M. Carrick are principals in the Structured Finance Group at Studley in Los Angeles.
