The bidding-war climate for office properties among real estate investment trusts has Kilroy Realty Corp. eager to return to its development roots.
"All of us can buy buildings but buying buildings at auction prices creates a lower return," said John Kilroy Jr., president and chief executive of the El Segundo-based REIT. But few companies, he said, have development capabilities. "If you didn't stake out your position years ago, chances are that you're closed out."
Kilroy said his company began preparing for this phase of the market cycle five years ago, when it started purchasing infill locations, laying infrastructure and entitling projects.
Today, Kilroy has more than $500 million of new projects in the pipeline that are expected to break ground next year, and it controls some of the largest undeveloped sites in two of the tightest office markets in L.A. County West Los Angeles and Calabasas.
In West L.A., Kilroy is about to close escrow on an eight-acre parcel that runs from Bundy Drive to Centinela Avenue along Olympic Boulevard. Kilroy intends to develop a $75 million office park there, consisting of two separate 150,000-square-foot office buildings and renovation of an 80,000-square-foot building that currently sits on the site.
Kilroy plans to have that to-be-renovated building occupied by mid-1998. Once escrow closes on the site later this month, the REIT plans to begin seeking city permits to build the lowrise, campus-style buildings that will be marketed to the entertainment industry, whose rapid growth has made space on the Westside increasingly scarce.
Farther west, Kilroy has designs on the Ventura (101) Freeway office market a magnet for high-tech companies. Kilroy plans to develop a 500,000-square-foot office building on 20 acres of a 50-acre site called Calabasas Park Center. Kilroy expects to receive entitlements from the city of Calabasas for the office project by early next year, and the REIT is currently in escrow to sell 20 acres of its site to developer Rick Caruso, who plans to build a "village-style" entertainment-retail center there. Kilroy plans to sell the other 10 acres to various parties for build-to-suit projects.
To the south, Kilroy plans to begin development on the first building of the third phase of its Long Beach Airport office complex. Kilroy already has building approvals and will start site work on the 140,000-square-foot building within the next few weeks.
Kilroy noted that only 5 percent of the airport complex's existing 630,000 square feet of space is vacant. The REIT has entitlements to develop an additional 760,000 square feet of office space on the site.
Adjacent to Burbank Airport, Kilroy is in escrow to purchase a 32-acre site, which it intends to develop into "hundreds of thousands" of square feet of office buildings, Kilroy said. Phoenix-based Vestar Development Co. will do the retail portion.
In addition to those projects, Kilroy also has about $250 million of development projects slated for Orange and San Diego counties. A portion of those projects $150 million worth came from Kilroy's acquisition of the Allen Group of San Diego last month.
"I'd have to say this is the best growth cycle I've seen in 21 years in Southern California," Kilroy said.
Commercial real estate brokerage isn't usually a field that's recognized for its creativity, but a new award intends to change that.
David Hasbrouck of Cushman & Wakefeld and Howard Sadowsky of Julien J. Studley Inc. received the inaugural Summit Award for devising the most innovatative real estate transactions in Los Angeles in 1997.
Hasbrouck, executive managing director at Cushman & Wakefeld, received the award in the investment category for his representation of Teachers Insurance and Annuity in its sale of Citicorp Center & Seventh Street Market Place in downtown to Toronto-based TrizecHahn in March 1996. Hasbrouck, who led a team of brokers that included Richard Plummer and John Eichler, was recognized for selling the project during the real estate slump and generating a record price $130 million. Furthermore, the Cushman & Wakefeld team overcame an ugly setback during its marketing effort: Federated Department Stores announced that it was closing Bullock's, one of two anchor stores in the Seventh Street Market Place.
Sadowsky, executive vice president of Julien J. Studley, won for the most ingenious lease transaction in his representation of Troop Meisinger Steuber & Pasich on its 140,000-square-foot lease at Century Plaza Towers in Century City. The $65 million deal was completed in September.
The transaction required an early lease buyout of an existing tenant in order to create a block of space large enough for Troop Meisinger, and it also marked the first time a tenant used a bond rather than a personal guarantee to ensure its lease.
Tenants traditionally have to pay 1 percent of the total lease value from their own pockets, Sadowsky said, and this concept allowed a tenant to secure a lease without impacting its balance sheet. Mike Catalano of Studley assisted in the transaction.
The awards were sponsored jointly by the Real Estate Investment Advisory Council, the Los Angeles Commercial Realty Association and the Building Owners and Managers Association of Greater Los Angeles.
This year is almost over, which means investors are rushing to close their acquisitions. Among some of the deals that cleared last week:
- Lowe Enterprises Inc. purchased the 1935 Buena Vista Building in Burbank from Warner Bros. The entertainment company, a tenant in the building, sold its 130,000-square-foot office, then immediately negotiated a 12-year lease to stay there. L.A.-based Lowe purchased the building, located at the corner of Buena Vista and Empire in the Media District North area, on behalf of a pension fund client.
- Beverly Hills-based REIT Arden Realty Inc. closed escrow on two buildings last week, the 12301 Wilshire Building known as the Wilshire Pacific Plaza in West L.A. and the 425 Colorado building in Glendale. The two buildings, which each contain about 100,000 square feet, were purchased from Mutual of New York.
An item in last week's column identified Insignia Commercial Group as being the brokerage that represented Boston-based investment group TA Associates in its acquisition of a 27-acre site in the City of Industry. Insignia actually only handled a minor aspect of the deal. TA was primarily represented by Anthony Brent and Bill Lee of Lee & Associates.
Joyzelle Davis covers the real estate industry for the Los Angeles Business Journal.
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