The folks at Santa Monica-based Kennedy-Wilson Inc. think they have a smarter strategy than the real estate investment trusts that have been buying up so many office buildings and they have $200 million in financing to find out whether they’re right.
President Bill McMorrow said the company, once primarily an auction house but now more diversified, plans to spend the money on under-leased office properties that Kennedy-Wilson will then improve and market aggressively. The idea is then to sell the fully leased properties for a profit.
McMorrow said publicly held Kennedy-Wilson is taking the opposite tack from the strategy pursued by most REITs which tend to buy fully leased properties.
“They need the cash flow to pay dividends,” McMorrow said. “We buy properties that are only 40 to 50 percent leased.”
For example, two downtown buildings Kennedy-Wilson bought last year, 818 W. Seventh St. and 611 Wilshire Blvd., were only 35 percent leased when the company purchased them. They are now about 75 percent leased.
“It usually takes us about 18 months to two years to get them fully leased,” McMorrow said. The company now owns about 1 million square feet of office property, primarily in Southern California.
Kennedy-Wilson’s $200 million in financing includes commitments from a number of lenders, the largest being Nomura Asset Capital Corp., with $100 million.
McMorrow said some of the funding also will go to the company’s residential development arm, KW Properties, which has about 400 new homes under construction.
Kennedy-Wilson was noted for conducting some of the country’s largest auctions of foreclosed properties after the collapse of the savings and loan industry. McMorrow said auctions now represent only 10 percent of the company’s business.
Law firm to stay downtown
One of the oldest and largest law firms in Los Angeles, Loeb & Loeb LLP, recently considered moving from its downtown L.A. offices, but has decided to extend its lease for another five years.
Jim Friedman, a Loeb & Loeb partner specializing in real estate leasing, said downtown’s lower rents was the major factor that convinced the partners to extend their lease on 82,000 square feet of space at 1000 Wilshire Blvd. to the year 2007.
Among other locations, the firm considered a move to Century City, where Loeb & Loeb already has an office. But the difference in rents and several other factors entered into the decision to stay downtown, Friedman said.
“Conditions are on the mend in downtown, rents are going to move up here, and we wanted to lock in some more years on our lease while these desirable rents are still available,” Friedman said.
Loeb & Loeb moved into the 1000 Wilshire building in 1987 and still had five years left on its original lease at 1987 rental rates that were substantially higher than the current market price. The firm negotiated lower rates by adding another five years to the lease, he said.
Victor Feathers, vice president of New York-based Reliance Development Group, which manages the 1000 Wilshire building for Sumitomo Life Realty (N.Y.) Inc., viewed the Loeb & Loeb lease as a vote of confidence for the downtown L.A. office market.
“Loeb & Loeb had a whole range of alternatives on what it could have done,” Feathers said. “I think it bodes well that this old, established downtown firm elected to stay here.”
L.A.: Land of cheap manufacturing?
A Korean textile firm has leased a building in Compton to take advantage of lower business costs in the United States.
Gene Choi, general manager of Salus-IECO Corp., said the company leased the 238,000-square-foot building at Artesia and Wilmington boulevards because manufacturing its rayon and polyester yarn will be less expensive at a U.S. operation despite the “misconception” that Korean manufacturing costs are lower.
“Lots of people ask me about this because they think the costs are lower in Korea, but the labor costs there are almost the same as here, and the water, electric and other utilities are higher,” said Choi, who said the overall cost of serving U.S. customers will be cheaper here than in Korea. Salus-IECO formerly occupied 10,000 square feet of space in Irvine. Choi said the company needs much more space now because it will begin making yarn that formerly was imported from Korea.
Broker Don Smith of Lee & Associates in Torrance, who represented Salus-IECO in the deal, said the company leased one of the few available large spaces at the Los Angeles Industrial Center, an 18 million-square-foot complex that stretches along several miles on both sides of the Artesia (91) freeway in Compton, Carson and unincorporated areas of Los Angeles County.
Despite its huge size, Smith said the industrial center has relatively few large spaces left because of the strong demand for manufacturing and warehouse space. Smith said the center is actually a group of industrial buildings and parks, most of them owned by a number of big institutional investors.
Smith said the 41-month, $2.8 million Salus lease was one of the largest lately in the park, where tenants run the gamut of distribution and manufacturing companies.
Health care sale
Beverly Hills-based G & L; Realty Corp. has paid $22.5 million for 100 percent ownership of six health care facilities in New Jersey that the real estate investment trust jointly purchased in March with PHP HealthCare Corp.
G & L; President Steven D. Lebowitz said the company’s holdings now total 21 medical office buildings, all of them in Southern California except for the newly acquired New Jersey properties.
G & L;, which was founded in 1976 and went public in 1993, specializes in buying and holding medical buildings. G & L; announces far fewer deals than REITs buying general office buildings because medical facilities tend not to change hands very often.
“They don’t sell much because they are owned by doctor groups and hospitals, most of whom want to maintain control of the buildings,” Lebowitz said. “They also require a knowledge of what’s going on in the health care industry, which requires more electrical power, more plumbing, backup power systems, special elevators to haul gurneys, and other special requirements.”
As part of the deal to sell its interest to G & L;, Lebowitz said, PHP has signed a 17-year lease for the six properties.
Contributing reporter Bob Howard writes on real estate for the Los Angeles Business Journal.
