Even During a Challenging Year, Real Estate Shows Some Encouraging Signs

Even During a Challenging Year, Real Estate Shows Some Encouraging Signs
The AES Redondo Beach Power Plant sold in April to a private developer.

After years of record sales, the commercial real estate industry saw a marked slowdown in 2020.

The number of deals in Los Angeles County dropped 44% last year compared with 2019, according to Newmark Group Co-Head of Capital Markets Kevin Shannon.

“The big story of the year was the pandemic and the resulting pullback of investment activity of all kinds.” said Eric Willett, regional director of research and thought leadership at CBRE Group Inc. “In the second quarter, we saw sales practically grind to a halt.”

But after the initial knockdown caused by the arrival of Covid-19 last spring, the industry began to stage a partial recovery.

“Sales were off. For the most part, last year, the second quarter, everything got shut down. You lost time. The third quarter started to pick up, and the fourth quarter got busier,” Shannon said.

There was, however, one notable bright spot last year: industrial real estate.

Brentwood-based Rexford Industrial Realty Inc., for instance, closed on roughly $1.2 billion of industrial properties last year in Southern California. One of the largest assets it purchased was Gateway Pointe, a four-building industrial campus in Whittier that the company bought for nearly $300 million.

“Industrial in L.A., there’s insatiable demand,” Shannon said. “Whatever you put out (on the market) is going to clear in L.A.”

Other buyers of industrial space in L.A. included Blackstone Group Inc. and PGIM Real Estate.

“Capital markets want as much industrial in L.A. as they can find,” Shannon added.

Big sales

Other asset classes saw some significant sales as well.

Blackstone purchased a 49% interest in the Hollywood Media Portfolio of Brentwood-based Hudson Pacific Properties Inc. The deal valued the portfolio at nearly $1.7 billion.

Hudson Pacific retained a 51% ownership stake and is responsible for day-to-day operations of the studios and office buildings in the portfolio. 

“Markets like Culver City and Hollywood are ground zero for content creation,” Shannon said. “Those markets are going to do really well once we get people back to work because there’s clearly pent-up demand for content. Capital likes those submarkets that are home to those types of users.”

Willett added that niche asset classes such as studio space and data centers were likely to see continued interest in 2021.

A few big office properties also traded hands last year, including two sites downtown.
New York-based Silverstein Properties Inc. purchased the iconic U.S. Bank Tower for $430 million from 
Singapore-based OUE Ltd. in a deal that was announced last summer. Experts had predicted a year earlier that the property would sell for closer to $700 million.

Later in 2020, Rockwood Capital and LPC West, the West Coast arm of Lincoln Property Co., sold the 22-story office building at 915 Wilshire Blvd. for $196 million. Deka Immobilien, a German real estate investment company, acquired the downtown office tower.

Another big office transaction last year was 5900 Wilshire Blvd. in Miracle Mile. Rockpoint Group purchased the 32-story, 465,000-square-foot tower for $312 million from PGIM Inc., AXA Equitable Life Insurance Co. and Ratkovich Co.

The deal closed prior to Covid safer-at-home orders.

Changing dynamics

Michael Zietsman, a principal at Zietsman Property Group, said many of last year’s deals were either in the works before the pandemic or closed before Covid kicked in.

“The whole dynamic of the market changed primarily because of the uncertainty out there,” he said.

He added that buildings trading now often had long-term leases in place, so the buyer has some certainty. That also makes it easier to underwrite the property, he said.

Arty Maharajh, a research manager at Avison Young, said office sales were at one of the lowest levels in the past decade but not as bad as right after the Great Recession.
He called overall sales “significantly muted compared to the past years. All of commercial real estate … has contracted from 2019. All commercial real estate sales are down to the lowest levels it’s been since the Great Recession,” he said.

Stream Realty Partners’ Mike Adams added that office sales were down drastically. In 2018, $7.3 billion worth of office product sold in L.A., and nearly $8 billion worth of the space traded hands in 2019. But in 2020, only $4.2 billion worth sold.

But there are signs that the worst has passed.

“The good news is that 2020 finished stronger than we anticipated. It started off pretty strong, but there was a notable drop in Q2,” Adams said, adding that $510 million worth of office product sold in L.A. in the second quarter, compared to the average of $2 billion a quarter for the last five years.

Other sizeable deals last year include AES Corp. selling a 51-acre coastline site in Redondo Beach to private developer Leo Pustilnikov. The AES Redondo Beach Power Plant is at 1100 N. Harbor Drive.

The land is expected to be redeveloped to include 25 acres of open space and a mixed-use development.

Elsewhere, multifamily properties attracted more interest than categories such as hotel and retail but didn’t quite measure up to industrial.

One of the biggest multifamily transactions involved the Wilshire Vermont at 3183 Wilshire Blvd. in Koreatown. Palo Alto-based Klein Financial Corp. recapitalized the project in a deal valuing the 449-unit building at $135 million.

San Francisco-based Divco West Real Estate Services was brought in by Klein Financial as a joint ventur
e partner, replacing Hearthstone Housing Foundation and CalPers. Industry observers, encouraged by the stronger-than-expected finish in 2020, are optimistic 2021 will bring continued improvement.

Shannon said this year would be “clearly better than 2020,” but it was unlikely to hit 2019 sales levels.

Willett called 2019 “a really remarkable year,” adding that 2021 would not reach those levels but could start getting back to normal sales levels.

More deals expected

Experts say it’s likely that more companies will be looking to offload properties in this year.

“There’s a lot of capital that is still in the market … and there is going to be more pressure on some investors and sellers,” Zietsman said. “some of the larger core funds are likely to sell properties this year.”

New sellers could mean new opportunities.

“The nimble investor will be able to capitalize on some deals in 2021,” Adams said.
But right now, there is “a pretty big spread between the ask and the bid. I don’t anticipate that that will change anytime soon. There will need to be a much lower slowdown on leasing activity, which could happen. There has been an abundance of sublease space put on the market, which will likely slow down activity on the leasing space.”

Experts anticipate industrial will remain in high demand as well as buildings with long leases in place.

“The bright shining star of last year, and we expect this to continue into 2021, has and will be industrial. It is in hot demand,” Willett said.

He expects to see more multifamily and office deals than in 2020 but fewer than in 2019.

On the multifamily side, Shannon believes there will be more land deals as developers look to build multifamily housing that will come online post-pandemic.

People working from home have had a huge impact on the office market. But experts say the vaccine rollout could lead to more sales.

“Capital markets like transparency. I think you are going to see office market sales pick up in the second half of the year,” Shannon said.

Avison Young’s Maharajh added that despite a vaccine working its way through the population, the current uptick in Covid-19 cases could impact sales. “I don’t think we can bounce back in 2021. There’s too many unknowns starting the year,” he said.

Still, he said L.A. was unique compared to other cities because of its variety of tenants, including, tech, media and financial companies, and that would help in the long run.

L.A. “is still one of the most desirable markets. It’s a good diversification among the tenant base,” Zietsman added.

Shannon said it was likely it would take two years for sales to get back to 2019 levels.

Keep reading the 2021 Money Issue.

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