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A New Dawn for Real Estate? : Recession: Commercial properties are being bought up by 'bottom-fishers' in anticipation that the worst of the slump is over.


The commercial real estate market in Southern California is finally starting to thaw after three years of being in a virtual deep-freeze.

An estimated $1 billion worth of office buildings and other types of investment property has sold since the start of the year, according to researchers at Grubb & Ellis, as "bottom-fishers" scoop up assets at fire-sale prices, betting the worst of the slump is over.

"The market finally seems to be turning around," said Richard Plummer, a broker for Cushman & Wakefield who recently sold a $25-million office tower in Century City--his first sale in more than a year. "Prices are down, but they're stabilizing. Investors want to buy before values start going up again."

Overbuilding and a sluggish economy have pushed commercial property values down as much as 50% from their 1990 peaks, according to Grubb & Ellis. Property sales plunged as investors waited for the market to hit bottom.

Now, some experts say, the bottom is here--and investors are putting their money on the line. For example:

* In La Jolla, a group led by Los Angeles investor Jeffrey Gault recently paid $25 million for a shopping center that cost twice that much to build 14 years ago.

"Many developers are over-leveraged and they've got their lenders breathing down their necks," said Gault, who linked up with Los Angeles-based insurer SunAmerica to buy the La Jolla Village Square from cash-strapped May Department Stores and R. H. Macy.

* In Century City, a group headed by developer Dick Zinan bought a 16-story office tower after its anxious owner--National Bank of Canada--agreed to a below-market-rate loan for 90% of the purchase price. That was the sale brokered by Plummer.

* In Long Beach, Chicago-based real estate giant LaSalle Partners sold the Union Bank Building overlooking the Queen Mary to a law firm for $5.4 million--reportedly just one-fourth the price LaSalle had paid to purchase and then renovate the property a few years ago. "It was cheaper for us to buy than rent," said attorney Skip Keesal of Keesal, Young & Logan, whose new law offices command sweeping ocean views.

Banks have written off more than $2.1 billion in California real estate over the last two years, according to the Federal Reserve Bank of San Francisco, and have quietly put some of those properties up for sale. At the same time, the Resolution Trust Corp. has auctioned off another $150 million in Southern California real estate from failed savings and loans.

"With so much inventory hanging over the market, prices had nowhere to go but down," said Bob Bach, Grubb & Ellis' director of research. "But now prices are stabilizing, and we could gradually see some upward pressure as supply comes back closer in line with demand."

Some real estate analysts remain skeptical. Noting that the recession in Southern California is far from over, they say businesses are still laying off workers and cutting back on their office needs.

Another round of riots in Los Angeles would also be devastating, said Sanford R. Goodkin, a well-know San Diego-based real estate consultant. "If there are more riots," Goodkin said, "a lot more companies are going to leave the area and a lot of companies that are thinking about moving here are going to forget all about it."

On the other hand, some analysts argue that the worst of the layoffs in aerospace and other major industries appears to be over. And while commercial vacancy rates here remain higher than in most other major markets, they appear to be steadying and should slowly decline thanks to the slowdown in new construction.

"I don't think any of these investors expect to get rich overnight," said Plummer, the Cushman & Wakefield broker. "Most of them are buying for the long-term. And long-term, the 'smart money' seems to be saying that L.A. is going to be OK."

Morgan Stanley, the investment banking firm in New York, seems to agree. In January, one of its partnerships agreed to purchase a package of troubled properties from San Francisco-based Bank of America for $1 billion. The properties--about a quarter of which are in Southern California--sold for about 60% of their original book values.

Late last year, a partnership of Colony Capital and GE Capital agreed to pay the RTC $210 million for some of the troubled loans held by San Diego-based Great American Bank, which failed in 1991. The properties underlying the loans--ranging from strip shopping centers to apartments, almost all in Southern California--once had a total book value of $500 million.

Like most bottom-feeders who buy pools of loans from the RTC, the partnership plans to negotiate settlements with some of its borrowers, while selling other properties to individual investors.

The most promising projects, however, could be kept by the partnership.

"We're confident about the long-term future of Southern California's economy and its property values," said Colony Executive Vice President Kelvin Davis, who helped to put the deal together. "We're not scared of this market at these prices."

Other big fish are said to be cruising the Southland's commercial-property waters.

In February, New York financier George Soros announced a $525-million fund to be managed by Paul Reichmann, former head of the ailing Olympia & York real estate empire. Neither will comment on their plans, but a business associate who knows Reichmann well said at least some of the cash is headed for the West Coast.

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