By JOYZELLE DAVIS

Staff Reporter

The resurgent L.A. economy has put real estate back in the money.

Residential brokers are sorting through multiple offers almost as soon as they list their homes, architectural firms don't have enough employees to handle their new business, and lending institutions are once again returning developers' phone calls.

Although the volume and competitiveness of deals is similar to the last real estate boom, there's a fundamental difference for much of the market, particularly on the commercial side.

Essentially, there's a new kid on the block: Wall Street.

And this new player has changed the complexion of deals, from the pace that architectural firms perform renovations to what happens to a building's property management once a real estate investment trust assumes ownership.

The stock market has also affected the world of residential real estate: Many high-end Realtors say that clients are often investment bankers or multimedia executives who have cashed in their stock options.

"It's a completely different market," said Bob Safai, a partner at the commercial real estate brokerage Madison Partners. In the '80s, he was on the other side of the table, working in the acquisitions arm of a now-defunct real estate investment trust.

Today, Safai handles both investment sales and tenant leasing at his Westside firm. Last year, Safai did $135 million in commercial investment deals.

"The '80s were more relationship-oriented than knowledge-driven," he said. "Today a broker has to understand not just the asset itself and who the players are, but the capital markets and access to debt and equity."

For example, Safai persuaded a building owner last year that it was in his best interest to sell his office property now rather than wait to see if the market would drive up acquisition prices. He used a financial model to demonstrate that the costs of replacing tenants after the existing leases expired would have cut into the potential profits from rising property values.

Wall Street has impacted business practices at interior design and architectural firms as well. Executives say they are no longer dealing in many developer-driven "speculative" projects, which were the bulk of their contracts in the late '80s. Now the majority of their work is in build-to-suit projects or renovation projects for companies that sell their completed buildings to REITs.

"The REITs have had a profound change on the ownership patterns and motivations of developing real estate," said Ed Friedrichs, president of Gensler Architecture, Design and Planning Worldwide, an architectural and interior design firm.

REITs are motivated by an income stream and a responsibility to shareholders, he said, whereas developers receive fees that benefit their private operations.

Todd Doney, senior vice president at Cushman Realty Corp., who did almost $57 million in office landlord transactions last year, said real estate will always remain a service industry.

"It's not like we're selling widgets," Doney said. "Your time, your knowledge and your reputation are everything."

Doney combines a bit of the old and the new in his work maintaining a database while also nurturing personal relationships.

He tracks all of the tenants leasing more than 5,000 square feet in the office markets he covers the Tri-Cities and downtown and prioritizes the businesses according to when their leases are expiring. To keep the personal touch, he will often call on companies whose leases will expire within the next two years.

Doney estimates that 85 percent of his business involves repeat customers. He maintains his relationships by taking clients out to lunch, sending them corporate newsletters, and calling them if he thinks of a way to save them money on their real estate expenses.

"I'm always looking for opportunities," he said. "If I've got a good idea, I'll contact them in a heartbeat."

A decade ago, Japanese investors and thrift-backed developers were driving the market. Brokers could often sell properties on "cap rates" a formula for determining the value of a building by dividing an annual interest rate into project income.

American real estate practically sold itself to the Japanese, who could borrow money from their banks at interest rates below 4 percent and invest in U.S. real estate that promised a 6 percent return.

Domestic S & Ls; made aggressive construction loans to developers, ultimately ignoring troubling absorption rates because purchases were pegged to the belief that inflation would escalate rents.

The brutal real estate collapse of the early '90s upended such rosy beliefs. Now, a successful broker must both understand Wall Street money and know how to sell to it.

"The days of a simple one-year pro forma analysis are long gone," said Lynwood Fields, a partner at Madison. "Now you've got to devise a comprehensive financial analysis before you even think of approaching a buyer or seller."

More than ever, brokers have to sell their real estate, not just as an individual property, but as an asset that competes against the smorgasbord of other investments Wall Street has to offer.

"Real estate is now a fungible commodity," said George Smith, chief executive of the mortgage brokerage firm George Smith Partners Inc. "It doesn't have the special class that it once had among private investors." He said a lot of them would rather buy REIT stocks than be bothered by the hassle of owning and managing properties.

Another difference: In the '80s, investors typically bought their properties with the intention of holding them for the long term. They were guided by the belief that "inflation in rents would solve any ill in the market," Smith said. "Now investors have a short-term horizon, and they put a premium on knowing the cash-flow now," he said.

Industry observers are quick to point out that there are still private investors active in real estate. But REITs and Wall Street investment funds have been ratcheting up their presence in L.A. REITs invested $2.4 billion in Los Angeles last year, accounting for 5.3 percent of the acquisitions.

Although 95 percent of the real estate sales last year went to non-REITs, the REIT sales were heavily skewed toward trophy properties and large portfolios.

And a number of other major investors, such as Lincoln Property Co. and Morgan Stanley Real Estate Funds, are fueled by Wall Street money.

The growth of securitized real estate has transformed the investment side of the business most dramatically. But it has had repercussions on the leasing side of the business as well.

Now most REITs handle the leasing "in-house," through their own staff. So once a broker has sold a building to a REIT, that's the end of his profit.

"It used to be that if you did something good for a guy, you'd get the (lease) listing on the way out," said Craig Stevens, principal at the Stevens Co.

"Everyone is making money these days. But it will be interesting to see what happens in a few years when all the properties have been sold and the REITs completely control the market," Stevens said.

Real estate brokers have always prided themselves on their entrepreneurial spirit. This year's real estate award winners are distinguished by their initiative in courting clients and their ability to predict changes in the industry.

"You've got to keep your overhead low and guesstimate what is coming next," Safai said. "In this business, you're only as good as your last deal."

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