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Southland Office Sales Up 60% Over 1996

Investors Are Buying Bigger, Paying More


With Wall Street-backed real estate investment trusts and institutional investors leading the way, real estate investment activity skyrocketed in Southern California last year as buyers poured about $3.2 billion into office property acquisitions in Los Angeles and Orange counties--nearly 60% more than in 1996.

Not only are investors acquiring more Southland office properties, they're also buying bigger buildings and paying more for them, according to a survey just released by brokerage Cushman & Wakefield Inc.

"We're finally in that rare 'sweet spot' in the [real estate] investment market cycle where buyers are comfortable that values will continue to rise, while many owners think the market is near its peak and are willing to sell," said Richard J. Plummer, a veteran Los Angeles office investment broker who compiled the survey.

The survey examined sales of office buildings with 50,000 or more square feet that didn't trade hands through "sister company" transactions or in large, multi-property portfolio sales.

By far the sweetest spot for office building sales is the Westside, where rents have recovered sharply as strong tenant demand has absorbed much of the space emptied during the early-1990s recession. Investors snapped up 39 Westside buildings, spending $1.75 billion--more than half the total spent in Los Angeles and Orange counties.

Also attractive to investors were Orange County and the San Fernando Valley, which are experiencing relatively strong recoveries. But the still-struggling downtown L.A. financial district saw only two major buildings trade hands last year, a reflection of stubbornly depressed rents.

Plummer said he expects to see more activity downtown this year, as illustrated by the expected sale of the Figueroa Plaza complex. He said he is surprised by the dearth of sales in the low-vacancy Burbank and Glendale areas, which saw only a handful of office buildings trade hands last year.

Also slow was Long Beach, where suburban buildings proved more popular than the city's downtown district, which continues to recover from its early-'90s slump.

But the sheer volume of activity was noteworthy. As the local economy pulled out of the recession and real estate capital markets opened up again after several sleepy years, commercial real estate investment activity in the L.A. area began taking off in 1995.

Office acquisitions had remained remarkably slow during most of the 1990s, with aggregate sales in L.A. County typically totaling well below $500 million annually from 1991 to 1994. The pace began to pick up substantially in the middle of the decade, with activity nearly doubling in 1995 and again the following year, before jumping by about another $1 billion to approximately $2.76 billion last year. In Orange County, investors spent $485 million, doubling the previous year's total.

Buyers are apparently focusing on large buildings, Plummer said. Although the number of L.A. County office buildings sold rose only 5% last year over 1996, the aggregate dollar amount spent jumped about 57%.

Sales of certain major properties--including two of Century City's most visible landmarks--highlight the movement toward larger transactions. Institutional investors advised by a J.P. Morgan & Co. affiliate bought the twin Century Plaza Towers complex for about $485 million in early April. And late in the year, a group headed by financier Marvin Davis, one of the towers' original developers, acquired nearby Fox Plaza for $253 million.

Property values are rising too. Over the course of 1997, prices that local Class A buildings fetched--on a per-square-foot basis--rose between 15% and 25% for downtown L.A. high-rises to as much as 40% for top Westside and Orange County properties.

Driving sales is the fact that investors--with some exceptions--can still acquire regional office buildings at prices below what it would cost to develop them today. However, Plummer noted that some trophy-type buildings in top locations have actually fetched prices beyond those so-called replacement costs.

Nationwide statistics indicate that property is appreciating faster here than in other large metropolitan areas. The recently released CB Commercial National Real Estate Index notes that the prices for Class A office properties in central business districts around the country typically rose by 12.4% last year, with rents rising an average of 11.6%. For Class A suburban commercial buildings, the sales price gains averaged 14.3%, with rents typically climbing 9.6%.

Profiles of property buyers reflect a national trend. The C&W survey clearly illustrates Wall Street's aggressive push into commercial real estate in the Southland. Publicly traded REITs--cash-flush real estate investment trusts in particular--were by far the most active buyers, snatching up more than a third of the buildings sold last year as they invested about $1.3 billion in L.A. and Orange counties.

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