Investors in Los Angeles real estate are being cautious about new acquisitions after a flat first quarter, driven by a slowing economy that optimists predict is headed toward recovery and pessimists say will gradually deteriorate into a full-blown recession.
“I think generally that the consensus is that we are going through an economic slowdown,” said Bill Chadwick, managing director of real estate firm Chadwick, Saylor & Co. “The result is an abundance of capital available for real estate (investments), but at this point in time it’s very cautious.
“Pension funds and university endowments are likely to be patient. With many of these portfolios at or near their real estate allocations, there is no reason for them to be aggressive.”
With pension funds sitting on the sidelines, high-net-worth individuals have entered the office building acquisition market. “These opportunities offer investors a 14 to 15 percent (annual) return on their money,” he said.
Real estate could provide a defensive stronghold for these investors, even if the current economic slowdown were to worsen into a recession. Often, the risk of recession leads to building vacancies, but current restraint in debt markets should keep the industry from grossly overbuilding.
“We expect real estate investments will most likely provide welcome stability and attractive returns in a potentially volatile investment environment,” said Youguo Liang, managing director of research at Prudential Real Estate Investors.
Worrying about energy
Chadwick believes that energy will be a hot topic for the rest of the year, as investors search for properties that are served by city-owned utilities and not by Southern California Edison.
“Investors have been focused on energy concerns, which has turned Los Angeles into a sanctuary from blackouts and high prices,” he said. “In the long term, I’m confident we will work our waythrough these energy problems.”
Chadwick also predicted that finding attractive, solid-yielding buildings in good locations will become increasingly difficult.
In West Los Angeles, where commercial vacancy rates have been pretty tight for the past few years, however, the dot-com implosion could create some softness and weakening of office rents in the area, according to industry analysts.
“There’s a little bit of supply to clear out,” said Kevin Dretzka, managing director of Eastdil Realty. “But the amount of vacant space is very digestible.”
Mark Sullivan, executive vice president of Julien J. Studley Inc., said because of new construction and high-tech failures there is about 500,000 square feet of space available today in parts of West Los Angeles and Santa Monica.
“The frenzied atmosphere of the dot-coms, where landlords were getting $4 a square foot (in monthly lease rates) fully serviced has subsided,” said Sullivan. “Today, companies are renting space for $2.50 a square foot, fully serviced.”
Foreign investment in Los Angeles-area real estate has been extremely limited, according to industry observers.
“All the major property trades have been made with domestic capital, except for 1888 Century Park East in Century City,” said Dretzka. That building is owned by Bentall Corp. of Vancouver, Canada, which is looking to sell it.
The Japanese stopped investing in Los Angeles 10 years ago, pointed out Richard Ziman, chairman and chief executive of Arden Realty Inc.
Sullivan said first-quarter deals included J.P. Morgan’s purchase of the Water Garden II building, and Lazard Freres & Co. LLC’s purchase of the Universal Music building, both located in Santa Monica.
