Musical chairs in Los Angeles' office investment market kicked up a notch in the second quarter when Trizec Properties Inc., which had just closed a deal to buy $1.63 billion worth of Southland office properties, said it was being acquired by Brookfield Properties Corp. and the Blackstone Group.
The sale came as dust was settling on G.E. Real Estate and Chicago-based Trizec's $5 billion acquisition of Los Angeles-based Arden Realty Inc. in December. The $8.9 billion Brookfield-Blackstone deal is considered the second-largest takeover ever of a real estate investment trust.
Trizec officials say fattening up their portfolio for a cash-out wasn't what they initially had in mind when teaming up with G.E. Real Estate to divide up Arden's assets. But a floating rate bridge loan used to finance the Arden deal made it easier for potential Trizec suitors to assemble their own financing, because it cut the amount of secured, fixed-rate debt they would have to take on.
"Even though Trizec has made great strides and has delivered one of the best total returns to stockholders for office REITs during the past three years, the company continues to be undervalued in the public markets," said Trizec Chief Executive Tim Callahan said at the time of the announcement, providing one rationale for the company looking seriously at the Brookfield and Blackstone's bid.
The Arden acquisition added 5670 Wilshire Blvd., Howard Hughes Center and entitlements for close to 1 million square feet of new development to the trio of downtown L.A. trophy towers Trizec had acquired since 2002: Ernst & Young Plaza, Bank of America Plaza and Figueroa at Wilshire. Real estate veterans had characterized the $365 million Figueroa deal in June 2005 as overpriced at the time because the lease for a major tenant, Bank of the West, was set to expire in February. That would leave the building at only 62 percent occupancy at the end of the first quarter.
Now with the pending Brookfield and Blackstone acquisition, the timing of Figueroa at Wilshire comes off as almost prescient.
A trio of even quicker turnarounds was announced in the quarter. Kennedy Wilson Inc. purchased a prominent 12-story office building in Beverly Hills' "Golden Triangle" for more than $51 million. Broadway Real Estate Partners LLC sold the 108,000-square-foot building at 9701 Wilshire Blvd after purchasing it only about two years ago for $37.6 million.
During its ownership, Broadway boosted the occupancy to 95 percent from 85 percent. R.O.A.R. Management Co. Inc. a new talent agency formed by former Endeavor agent William Ward and former MGM vice president Jay Froberg recently moved into the building and took building-top signage.
After only 22 months of ownership, Portland, Ore.-based ScanlanKemperBard Cos. turned a tidy $18 million profit in April on its sale of the CNN tower in Hollywood to Broadreach Capital Partners LLC. Broadreach paid around $52 million for the 14-story, 200,000-square-foot building at 6430 Sunset Blvd. a nearly 60 percent markup from what ScanlanKemperBard originally paid. CNN owner Turner Broadcasting Systems Inc., which leases 16 percent of the building, had been considering moving its West Coast broadcast studios out of the building, but that move was put on hold.
San Mateo-based Glenborough Realty Trust said in May that it had bought a prominent five-story Universal City office building at 3330 Cahuenga Blvd for more than $30 million. Former owner Broadreach Capital picked up the property for $21 million about 18 months ago, when it was more than a third vacant. Since then, Broadreach Capital stabilized the property, raising occupancy to 100 percent.
Amid all the deal making, office vacancy rates continued to fall, with the countywide rate dropping to 10.2 percent from 11 percent in the previous quarter and 12.9 percent a year ago. Class A asking rents rose to $2.70 a square foot from $2.63 in the first quarter and $1.48 a year ago.
The fall in vacancy rates was broad, across all submarkets, with the San Fernando Valley posting the lowest rate at 6.1 percent compared to 8.1 percent a year ago. West Los Angeles showed the largest change, down to 7.3 percent from 16.4 percent.
Among the larger Westside lease deals in the quarter took place in May when Beverly Hills talent agency International Creative Management Inc. signed a sublease for just under 100,000 square feet in MGM Plaza in Century City. The 11-year deal has a total consideration worth just under $50 million. The ICM lease eliminated a large vacancy hanging over the Century City market when Metro-Goldwyn-Mayer Inc. downsized its operations after a coalition of private equity firms, Sony Corp. and Comcast Corp., purchased the studio last year.
Aerospace contractor Teledyne Technologies Inc. signed the South Bay's largest office lease of the quarter when it agreed to lease 120,000 square feet of expansion space for 10 years at 501 Continental Blvd. in El Segundo about eight miles from its headquarters.
Internet dating service eHarmony.com Inc. began moving its headquarters down the street and into one of Pasadena's newest office buildings this summer after signing a 47,500-square-foot lease at the IndyMac Bank Center in April. With the eHarmony lease, IDS Real Estate Services has filled nearly its entire 233,600-square-foot speculative project at 888 E. Walnut St., of which IndyMac Bancorp Inc. leases 77 percent.
The tightness of the Westside office market in particular is continuing to attract investors in new construction deals.
Lincoln Property Co. announced in May that it is acquiring a 14-acre site in Playa Vista for more than $100 million. Lincoln has formed a partnership with ASB Capital Management to build an 820,000-square-foot office building on the parcel, located near the Hughes' Spruce Goose building at the corner of Bluff Creek and Campus Center drives.
The seller, Playa Capital Co. LLC, already received city approval for the project. The high price for the land is a reflection of the growing demand for office space on the Westside, where buildings are filling up but few new projects are coming to market.
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