By BRAD BERTON
The biggest real estate news of the first quarter actually occurred a few days into the second.
After months of negotiations, an investment fund managed by a J.P. Morgan & Co. affiliate acquired Century City’s signature Century Plaza Towers complex for about $480 million.
While the recording came a few days into the second quarter, it provided an exclamation point to perhaps the most eventful calendar quarter the local commercial real estate community has seen in years.
Along with the continuing battle to launch the big seaside Playa Vista planned community, the Century Plaza Towers sale is one of the local real estate stories that made headlines in national media outlets during the quarter.
In line with local markets’ inconsistent recovery, much of the quarter’s news was quite positive for a change while signs of continued distress generated several less encouraging headlines.
Hence, some ominous foreclosure and bankruptcy activity was mixed in with some key local lease transactions and continued signs that L.A. commercial real estate has become quite the magnate for investment capital.
“Things are really bizarre out there,” said Jerry Porter, president of the Brentwood-based Metrospace Corp. commercial real estate brokerage, which made progress on numerous high-profile local assignments during the quarter.
Metrospace just took on another sizable assignment representing a sign of the times a fast-growing new entertainment concern seeking bigger quarters near the low-vacancy Burbank Media District or on the fast-recovering Westside.
The client is Sega GameWorks, which is seeking about 75,000 square feet of offices immediately and will need room to grow, Porter noted.
Growing media/entertainment groups that recently made major local facilities commitments include Activision Inc. (98,000 square feet at Santa Monica Business Park) and Viacom Inc.’s MTV Networks animation group (70,000 square feet near downtown Burbank).
Given such demand from growing tenants, expectations about better days ahead continued to generate bidding wars among various institutional investors for major commercial properties even in long-troubled downtown L.A.
Those expectations, and related bidding wars, are also the driving forces behind decisions to place more landmark-quality properties such as Century City’s Fox Plaza on the market.
“Due to the availability of capital and anticipation about growth (in L.A.’s tenant base and rental rates), we’re seeing an acceleration of investment activity and a change in the dynamics of real estate ownership,” said Brad Cox, who was just promoted to the senior managing director post within property services giant Cushman & Wakefield Inc.’s regional operations.
The “patient” institutions acquiring commercial buildings here today “are promising their investors higher rates of return and are willing to be aggressive in increasing rental rates,” Cox added.
And as those aggressive investors are often paying close to a property’s current “replacement cost,” some entrepreneurial players are now solidifying plans for the first major “speculative” (i.e., not pre-leased) commercial development projects the area has seen this decade.
No one’s broken ground yet, but plans for new office projects are inching closer to reality in the highest-demand areas such as the Burbank/Glendale vicinity and better Westside locales both driven primarily by expansion in the entertainment field.
Real estate’s ties to entertainment are also driving interest in substantial new retail developments.
Well-known local developer Ira Smedra is moving along with plans for a big entertainment-oriented retail center in Westwood Village, aircraft leasing magnate Lou Gonda is said to be purchasing a high-profile Beverly Hills development site, and a team headed by mall giant TrizecHahn Corp. is promoting plans for a major redevelopment project in the heart of Hollywood.
Enviably capitalized TrizecHahn also played the key role in the other huge local office investment transaction that recorded on title records the same week the first quarter closed.
The Toronto-based real estate company teamed up with Goldman Sachs & Co.’s Whitehall real estate investment fund to acquire downtown L.A.’s 41-story Citicorp Center office highrise and adjacent Seventh Market Place retail center for a reported $130 million to $135 million substantially more than experts had predicted just last fall.
That deal closed March 31, the same week Prudential HealthCare announced its intentions to consolidate some 1,400 employees within 300,000 square feet at Garland Center, the former First Interstate Bank operations center just west of the Harbor Freeway (110) from downtown’s highrise core.
That announcement, along with the confidence TrizecHahn and Goldman Sachs demonstrated with their acquisition, have already “helped generate a lot of enthusiasm about downtown,” said Kathy Schloessman, senior vice president with big brokerage CB Commercial Real Estate Group.
She also pointed out that major first-quarter financial commitments to downtown’s long-stalled Disney Hall concert venue, along with continued progress of plans for a major sports arena complex, are creating more optimism about downtown’s future.
But the Citicorp Center sale represents another illustration of the financial distress many major local properties still face even as values continue to recover.
Like several other noteworthy first-quarter examples, the well-leased highrise had carried mortgage debt funded in the roaring 1980s well beyond the property’s current market value.
Even though Cushman & Wakefield reports that rents at downtown’s top 20 office buildings have jumped 10 to 15 percent over the last year, the O’Melveny & Myers-led owners of the 26-story Mellon Bank Center sought Chapter 11 bankruptcy protection during the first quarter.
The owners said they’ve been unable to restructure maturing debt on the property totaling some $133 million an amount considered well beyond the property’s value.
The developers of three other well-known local office properties faced similar struggles during the first quarter.
The partnership that developed the Miracle Mile district’s 967,000-square-foot Wilshire Courtyard office complex likewise sought Chapter 11 bankruptcy protection after Bank of America which holds a first mortgage on the property with a $165 million balance sought to take the luxurious complex back through foreclosure.
Howard Hughes Corp. confirmed that it has agreed to relinquish the 16-story “6701 Tower” the biggest building within the Howard Hughes Center mixed-use complex in Westchester to mortgage lender Prudential Insurance Co. of America.
Prudential had funded a $64 million mortgage which factors to more than $200 per square foot, again beyond today’s market value in pre-recession 1988.
And a partnership headed by developer Roy McNeill agreed to deed the 21-story McNeill Plaza tower in Sherman Oaks to mortgage lender John Hancock Mutual Life Insurance Co. The property had carried mortgage debts totaling some $68 million (more than $180 per square foot) again, a level considered substantially in excess of today’s values.
Despite the lingering distress, signs of the slow-but-steady commercial real estate rebound in Los Angeles County abounded during the year’s first quarter, according to statistics from big nationwide brokerage Grubb & Ellis Co.
Within the entire 160 million-square-foot inventory of local office buildings G & E; tracks, net absorption amounted to 600,000 square feet during the quarter.
During 1996’s first quarter, the L.A. County office market absorbed just over 360,000 square feet.
Net absorption refers to the gain or loss in overall occupancy during a specified time period. In other words, tenants occupied 600,000 more square feet of L.A. County office space at the end of the first quarter than they had at year-end.
The office vacancy rate continues to slide with the improving tenant demand and absence of new construction. The rate was 16.8 percent at the end of the first quarter, down from 17.2 percent at year-end and 18.7 percent at the end of 1996’s first quarter, according to Grubb & Ellis.
Submarkets demonstrating particular strength during the first quarter were El Segundo/Manhattan Beach, LAX/Century Blvd., Beverly Hills and the San Gabriel Valley.
The weakest performers were Santa Monica, Miracle Mile/Park Mile, downtown Long Beach and the Conejo Valley.
The biggest local market, the downtown L.A. highrise district, essentially treaded water during the quarter, absorbing a scant 33,000 square feet. Vacancy there is now 18.6 percent, down from 20.8 percent a year ago.
And then there’s the ongoing battle over the 1,087-acre Playa Vista planned development and its would-be lead tenant DreamWorks SKG a story that has taken on a life of its own over the last six months or so.
However, as the quarter closed the principal players seemed to be about where they were at year-end.
Lead landowner Maguire Thomas Partners more specifically managing partner Rob Maguire is still negotiating a recapitalization plan with investors expected to infuse some $200 million in much-needed capital into the multi-billion-dollar development.
And DreamWorks is still waiting for the recapitalization to take place before it goes ahead with its primary corporate campus there the first major studio to be built in the area for more than a half-century.
However, there have been some major recent developments in the story.
Big Century City real estate investment manager Colony Capital Inc. is set to become a primary partner in the venture, along with Beverly Hills merchant banking firm Pacific Capital Group and Washington, DC’s Union Labor Life Insurance Co.
And in early March, the banking group holding some $150 million in mortgage debt on the Playa Vista property initiated a foreclosure action apparently serving notice to Maguire that he needs to close a recapitalization deal in a hurry or possibly lose the property.