L.A. commercial real estate began and ended the second quarter with a bang.
The quarter was ushered in with the closing of the “deal of the decade” the $480 million sale of the Century Plaza Towers. It ended with Marvin Davis paying one of the highest per-foot prices in West Coast history (nearly $400) to buy back Fox Plaza.
Billionaire Davis isn’t the only one impressed with the investment opportunities in Los Angeles commercial real estate.
Mike Ibarra, vice president at CB Commercial Real Estate Group Inc., said he recently attended a nationwide industry conference, and L.A. was “on everyone’s investment list.”
“That’s a promising sign,” he said, “because it’s one thing to put your faith in a market and another to invest there.”
That interest among investors seems at least partially due to the improving office vacancy rate. As of the end of the second quarter, 16.1 percent of the office space in L.A. County was vacant, a notable improvement from 18.3 percent a year earlier.
That improvement is largely the result of the region’s economic recovery, and economists generally expect that will continue.
The rate at which tenants absorbed L.A.-area office space slowed a bit in the second quarter. Tenants occupied 287,740 more square feet of office space than they vacated during the second quarter. That’s down from the 370,950 square feet of “net absorption” in the second quarter last year, according to Grubb & Ellis Co.
The second quarter’s absorption rate looks even less impressive when compared with first quarter 1997, when tenants absorbed 733,552 square feet of office space, more than twice as much as in the second quarter.
The explanation? Analysts stress that local real estate is a patchwork of laggards and leaders in the recovery, with certain areas of town doing much better than others.
“There’s a full-fledged recovery, but it’s not uniform,” said Hessam Nadji, vice president at real estate investment brokerage Marcus & Millichap. “But the recovering pockets are just doing phenomenal.”
Tight markets tightened even further last quarter. Burbank, Glendale and Pasadena known as the Tri-Cities market posted the lowest vacancy rate, at 7.7 percent, down from 9.7 percent a year ago.
The Westside’s popularity continues unabated; available Class A office space is in limited supply in Santa Monica, Century City, Westwood and Beverly Hills.
All of which spells the next stage of the real estate recovery: new construction.
Ron Nestor, a partner in the architectural firm of McLarand, Vasquez & Partners Inc., said he has seen business accelerate at “an incredible rate” over the past eight months. His firm is currently designing the Howard Hughes entertainment-retail center in Westchester, the Media Center in Burbank and phase two of the Water Garden office building in Santa Monica.
“I’d say the market is even stronger than in the late ’80s,” he said. “There’s all of this pent-up demand and no product.”
But the product is coming soon. Santa Monica alone is expected to add more than 775,000 square feet to its office market when The Arboretum and phase two of the Water Garden projects break ground later this year.
Transpacific Development Co. started construction in July on a 50,000-square-foot speculative office building in Cerritos, and PacTen Partners plans to break ground next month on a 500,000-square-foot office project in Glendale.
The project that dwarfs all those, Playa Vista, continued to be a source of friction throughout the second quarter. Principal parties of the $8 billion project where DreamWorks SKG wants to build its studio lot said they have reached a preliminary agreement to develop the property, a move that may get the troubled project off the ground by year’s end.
Meanwhile, some of L.A.’s lagging areas showed signs of life in the quarter.
The Mid-Wilshire office market has firmed up, going from 20.4 percent vacancy rate a year ago to 17.6 rate percent as of the end of the second quarter. But Mid-Wilshire remains ripe for bargain-hunters, local brokers said.
In April a group of investors headed by Dr. David Lee acquired the 32-story Equitable Plaza building for an about $35 million. The 630,488-square-foot tower had last sold in 1980 for about $46.5 million.
Downtown was fairly quiet last quarter, but the city and several private-sector investors are working to jump-start a renaissance.
Developer Lowe Enterprises Inc. began construction on downtown’s first modern industrial park, dubbed the Alameda Trade Center. And TrizecHahn Corp. gave downtown’s only regional mall, the mostly vacant Seventh Market Place, a new lease on life last quarter. The Canadian real estate company bought the property out of foreclosure and is now in the process of converting it into a hub of nightlife, entertainment and upscale dining strategically located near the proposed sports arena.
Tenants have leased about 3.01 million square feet in downtown through the first half of 1997 nearly double the mid-year 1996 figure of 1.38 million, according to Cushman & Wakefield, Inc.
Much of the recovery in downtown is evident in Class A buildings, where vacancy rates are at 10 percent. Lower-quality Class B and C buildings have vacancy rates in the 20 percents, according to Travers Realty Corp.
Even vacancy rates in the LAX/Century Boulevard submarket, the area’s weakest office submarket, are showing improvement. Vacancy rates for the area, which was eviscerated by the defense and aerospace spending cuts, dropped to 33.9 percent in the second quarter, down from 39.2 percent a year earlier.
Raffi Krikorian, managing partner for Sperry Van Ness, said the areas most damaged by the recession, riots and 1994 earthquake are still going through “hiccups,” but their health is starting to return.
“Prices (in lagging areas such as Northridge and LAX/Century Boulevard) haven’t firmed up with the same velocity we’ve seen on the Westside or Glendale,” he said. “But even in those areas you can’t find the same deals that were there nine months ago.”
That fundamental shift is evident in the strategies of real estate investment trusts active in the L.A. office market. REITS, which operate much like closed-end mutual funds except that the investments are in real estate instead of stocks, were some of the most aggressive investors in L.A. properties during the second quarter.
For the past two years, only value-conscious REITs and equity fund investment groups which are similar to REITs but not publicly traded purchased L.A. properties. Now many buyers no longer consider L.A. a bargain but a conservative investment, said Michael Adler, a partner at real estate appraisal firm Sommer Adler & Co.
“Vacancy rates have finally made this market profitable,” he said.
Last quarter, Menlo Park, Calif.-based Speiker Properties made its first L.A. purchase two office buildings in Pasadena for $68.2 million. Boston-based REIT Beacon Properties Inc. paid $99.4 million for Saban Plaza in Westwood, the “sister” highrise of the Wilshire at Westwood Beacon bought last year.
“The purchase activity should only increase as investors across the country realize that L.A. has finally recovered,” Adler said.
