In some respects, Wall Street already considers Arden Realty Inc. a goner.

The real estate investment trust, with roughly 120 office properties in Southern California, is on the auction block and a sale could be announced as early as this month, although some analysts are hedging their bets, saying that a deal could ultimately fall through based on price.

The Southern California office market is expected to tighten next year, providing some leverage to raise rents. So Wall Street has focused on the 10 percent premium that Arden is expected to receive on a sale at $50 a share. That values the company at $3.4 billion, although the assumption of its debt would push the price nearer to $5 billion.

Shares of Arden rose slightly to $45.54 a share last week.

The valuation placed on Arden has had a ripple effect on other high-quality office REITs in Los Angeles, primarily Kilroy Realty Corp. and Maguire Properties Inc.

Shares of Kilroy and Maguire are both hovering at 52-week highs and analysts believe Arden investors will likely plow their returns back into these two remaining office owners.

"The Arden transaction is a proxy for what other REITs are worth," said Jim Sullivan, senior analyst at Green Street Advisors Inc. in Newport Beach. "The Arden portfolio also is generally inferior in average quality to that of Maguire and Kilroy, so I think people will be looking to the price, and adjust for their higher quality."

Arden's high valuation could also impact Los Angeles-based Thomas Properties Inc. and Chicago-based Equity Office Properties Trust. The latter views Southern California as a core market, as it exits Dallas and Houston. Another large commercial property owner, Douglas Emmett Realty Advisors in Santa Monica, is planning at an initial public offering that could get a lift from an Arden sale.

Southern California focus
Last week, John Guinee, an analyst at Legg Mason Walker Wood Inc. in Baltimore, raised his rating on Maguire to "buy" from "hold," based in part on Arden's valuation.

"There are so few office REITs in good markets with the ability to grow rents and grow occupancy that investors will likely want to shift into another Southern California name to stay invested in one of the few good office markets," Guinee said.

Many office markets remain in the doldrums, with vacancies ranging from 15 percent to 25 percent. The exceptions are Southern California, New York's midtown Manhattan and Washington D.C. In fact, investors had penalized Maguire for considering moves to San Francisco and Washington, which would dilute the firm's core L.A. market.

Analysts believe that Kilroy is poised for major growth, especially in San Diego. It currently has seven buildings under construction, worth a total of 644,000 square feet, that are entirely leased. Kilroy also has 1.7 million square feet of land in the pipeline, or $600 million of additional space waiting to be built.

Richard Anderson, an analyst at Harris Nesbitt Corp., said he believes all office REITs will trade up when news of an Arden sale is announced. "What we've seen over the past few years now is that merger and acquisition activity has come to the rescue of REIT valuations, and most transactions have come at premiums to net asset value," he said.

Arden's investment bankers at Wachovia Corp. and Lehman Bros. Holdings Inc. have whittled down the suitors to Morgan Stanley, General Electric Co. and Starwood Capital Group LLC.

The appetite for private ownership of real estate in Southern California also could result in a venture in which a private financial buyer snaps up Arden and enters a joint venture with another REIT to manage its properties. This would be similar to a deal earlier this year in which office REIT CRT Properties Inc. was sold to New York-based DRA Advisors for $1.7 billion.

Arden is likely to get a better deal from a private buyer that can use more leverage and, hence, bid up the price. Moreover, selling at the top of the market is a strategy that has long served Arden Chairman and Chief Executive Dick Ziman.

"Ziman is a shrewd individual who's probably brave enough to walk away as well, so you don't have a done deal," said Anderson.

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