The 28-story KPMG Center, at 550 S. Hope St., sold on Christmas Eve to New York investment banking giant Morgan Stanley in a deal valued at as much as $242 million. The transaction affirmed downtown L.A.’s position as a commercial real estate market with a great deal of upside opportunity.
A unit of Morgan Stanley purchased the 590,200-square-foot property from Irvine real estate investment and management company LBA Realty and real estate management firm Principal Real Estate Investors, a division of Principal Global Investors of Des Moines, Iowa. The partners paid nearly $158 million for the property in 2011.
Even though LBA and Principal sold the building at a 53 percent premium over their purchase three years ago, at $410 a square foot, the year-end deal was still considered a bargain for an institutional investor looking for a high-quality property in so-called gateway cities.
Kevin Shannon, vice chairman of CBRE Group Inc. who leads investment sales in the western United States, said the L.A. office market is the lowest priced of six coastal cities where capital investors are buying now. Investment sales in Seattle are coming in at more than $700 a square foot, while deals in San Francisco are closer to $1,000 a square foot.
“The price-per-square-foot advantage (in L.A.) is significant,” he said.
CBRE had the listing for the property along with Eastdil Secured of Santa Monica.
The building, built in 1990, is located in the Financial District across from Pershing Square and between South Grand Avenue and South Figueroa Street. It was 95 percent occupied at the time of sale.
Representatives of the buyer and seller could not be reached for comment.
Shannon declined to comment on the specifics of the deal.
The deal was the second in as many months for LBA. The company, which also owns downtown’s AT&T Tower at 1150 S. Olive St. and the 150,000-square-foot Pacific Concourse offices near Los Angeles International Airport, closed on its $159 million purchase of the horseshoe-shaped Sony Pictures Plaza at 10000 W. Washington Blvd. in Culver City on Nov. 18.
That building, a 339,000-square-foot modernist project built in 1986 and occupied by Sony Pictures Studios since the late 1980s, was sold by Torrance developer Transpacific Development Co.
Justifying value
Arty Maharajh, vice president of research for commercial real estate brokerage and market analysis firm Cassidy Turley in downtown Los Angeles, said the price Morgan Stanley paid was steep for the local market but added that it might have been justified because the building was nearly fully leased.
The downtown market has been holding relatively steady, with its vacancy rate hovering around 19 percent for some time and average asking rents hewing to around $3.20 a square foot. The KPMG Center was 82 percent leased when LBA and Principal purchased it, and according to real estate data provider CoStar Group Inc., monthly asking rents at the building are around $2.33 a foot, leaving a good bit of upside for the new owner if it moves to bring the rents up to market.
Also, within the overall downtown office market, more tenants have moved into buildings throughout the year than have moved out, and rental rates for office properties have increased. All three factors are attracting institutional investors such as Morgan Stanley to the market.
“It’s the institutional nature of the buyer,” Maharajh said. “They see a recovering and strengthening downtown market.”
The price also indicates that downtown is finally starting to rebound from the real estate slump, albeit several years after similar markets, he said.
The long-term upside for the area, he said, is that rental rates will continue to increase and investors such as Morgan Stanley will find it worth the investment to upgrade older buildings – and that will continue to attract a broader range of companies, all of which is positive.
“Buildings will be newer and nicer,” Maharajh said. “With new landlords come a fresh aspect.”
