Downtown Roiled By Big Increase in Real Estate Deals

Staff Reporter

Downtown L.A.'s office market has gone through an investment churn over the past five months not seen in 15 years.

Four major buildings totaling 4.2 million square feet have changed hands or gone into escrow since April and three more representing another 4.1 million square feet are on the market and likely to sell in the next few months.

Add it up and 9.3 million square feet of office space, nearly a third of the downtown market and valued at more than $1 billion, could change hands in a flurry that started in March when Maguire Partners bought out Dai-ichi Mutual Life's 75 percent share of Library Tower.

"The last time we saw this type of activity was the mid- to late-1980s," said Richard Plummer, senior director at Cushman & Wakefield Inc. "That was when 50 percent of the Class-A buildings downtown were being built."

The flow of money into institutional-grade properties affirms a belief among investors that the city's effort to revitalize its urban core is more than a pipe dream, said Stephen Cauley, associate director at the Ziman Center for Real Estate at the Anderson School at UCLA. "With the stock market going kaput, money is hunting for places to go," said Cauley.

The city of L.A. is a beneficiary of the downtown churn.

Revenues from documentary transfer taxes are estimated to be $95 million for the fiscal year ending June 30, 2003, up from a projected $87 million a year earlier. Transfer taxes amount to 0.5 percent of the value of the sale.

"You get a half-dozen major transactions, that's pretty exciting, though it's only about 5 percent of our total revenue projections," said Bill Fujioka, city administrative officer. "It's significant, but give me five more."

The activity comes from a confluence of events, ranging from low interest rates to civic investments like Staples Center and Disney Concert Hall that have lured prospective tenants that would not have considered downtown in years past.

While L.A. County's office vacancy rate hit 17 percent in the second quarter from a recent low of 12 percent in fourth quarter of 2000, downtown's vacancy rate fell two percentage points in the same period, to 19 percent, according to Grubb & Ellis Co. For downtown's more prized properties, vacancy rates are significantly lower.

Volume rises

Library Tower and BP Plaza, the properties at the front end of the churn, are more than 90 percent occupied, while Ernst & Young Plaza will be fully leased by the end of the year, according to Michael Escalante, senior vice president at Trizec Properties Inc., which just bought the 915,000-square-foot building. Wells Fargo North and Union Bank Plaza, both on the market, are also more than 90 percent leased.

After Maguire's $300 million buyout of Dai-ichi's 75 percent share of Library Tower, Trizec struck a $110 million deal in June for Goldman Sachs Whitehall Street Real Estate Funds' 75 percent interest in Ernst & Young Plaza.

Next in the cycle will be Boston-based Beacon Capital Partners Inc.'s purchase of the 1.4-million-square-foot BP Plaza for $270 million.

Also in the works is the sale of Figueroa Plaza to Washington D.C.-based Northridge Capital for $90 million, according to sources.

Added to the mix is Japanese insurance firm Mitsui Seimei's desire to divest its U.S. properties. The firm has a 48 percent stake in the Wells Fargo Tower and Maguire Partners, a partner in the building, would like to buy it out, according to real estate sources. The move would increase Maguire's equity stake in the 1.3 million-square-foot building from less than 15 percent to about 60 percent.

"To the extent that our partners have other capital requirements and want to sell, we're interested," said Managing Partner Robert Maguire, who would not comment specifically on the Wells Fargo Center situation.

Waiting in the wings is the 1 million-square-foot 707 Wilshire Tower. Wells Fargo Bank bought out Equitable Life Assurance Society of the United States' 50 percent share last year. The property, otherwise known as the AON Building, may be put on the market in the first quarter 2003.

Then there's the 2.2 million-square-foot Arco Plaza. Orange County investor Ken Picerne acquired the debt on the property and could soon take title from the owner, Shuwa Investment Corp.

Fundamental change

"The activity is greater than it's been in many years due to the fact that fundamentals have improved considerably over that time frame," said Escalante.

While the fundamentals drawing buyers are largely consistent, the motivations to sell vary.

Dai-ichi, Mitsui Seimei and Shuwa are trying to divest from U.S. properties for which, in many cases, they overpaid in the mid-1980s. Library Tower was the last of six U.S. properties Dai-ichi sold in the last two years for an aggregate $2.2 billion.

For institutional owners like MetLife and Goldman Sachs, with product all over the country, the timing couldn't be better. Low interest rates and the safety of nearly full properties have increased returns and values.

With Ernst & Young Plaza valued at $150 million, Goldman Sachs Whitehall Street's share appreciated by 21 percent since it bought into the building in 1997.

"If you have 100 buildings and you have to sell six, you'd hate to pull the trigger in the Silicon Valley or Seattle," said Plummer, who is representing BP Plaza owner Metropolitan Life Insurance Co.

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