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COMMERCIAL REAL ESTATE

Tide Is Turning in Long Beach

Investors Are Buying Up Office Towers Amid a Downtown Recovery

October 13, 1998|BRAD BERTON | SPECIAL TO THE TIMES

Commercial property owners in oft-troubled Long Beach are growing optimistic that their office buildings will finally fill, as new city attractions and a recovering economy draw formerly elusive corporate tenants downtown. But the wait was too long for some building owners, who recently took advantage of rising prices and sold out.

They were part of a small group of ambitious developers who targeted the city for construction of dazzling office towers in the 1980s. One of their key calculations was that Long Beach's geographic advantages would be a magnet for professionals.

Given that Long Beach lies between Los Angeles County's biggest employment centers to the north and Orange County's booming commercial districts to the south, Fortune 500-types would want offices around the halfway point, builders reasoned. Ocean views from top quality quarters would be impossible to resist.

Unlike in the movie "Field of Dreams," however, they built it, but no one came--much to the chagrin of prominent local real estate entrepreneurs John Cushman and Michael J. Choppin, along with Japanese construction giants Taisei Corp. and Kajima Corp.

Because of a variety of economic, sociopolitical and even geographic circumstances, the addition of three "world-class" office buildings to Long Beach's skyline instead resulted in a disastrous glut of office space that has lasted the better part of a decade. The end of the Cold War didn't give the city much of a peace dividend: Long Beach's key naval base closed and its military- and aerospace-reliant economy lost about 50,000 jobs.

But now Long Beach's economy is recovering, and a bevy of new leisure attractions and public improvements--such as the popular new Aquarium of the Pacific--seems to bode well for the downtown office market's future.

And as has been the case elsewhere around the country as real estate markets began to recover from the recession, well-heeled investors are now picking up the pieces in downtown Long Beach. The most visible is Toronto giant TrizecHahn Corp., which closed its $63.8-million acquisition of the luxurious 21-story Shoreline Square building in September.

TrizecHahn Gets 2 Good Deals

The Shoreline deal came about a month after TrizecHahn plopped down $86 million for the nearby 24-story Landmark Square, which like Shoreline ranks among downtown Long Beach's three finest office properties. The World Trade Center, developed in 1988 by Choppin's IDM Properties Corp. and Kajima, is considered the third. IDM filed for Chapter 11 bankruptcy protection in 1992.

With downtown Long Beach landlords still plagued by low occupancy levels and rental rates, TrizecHahn was able to purchase the premium properties for well below their estimated "replacement costs," according to Trizec Hahn Senior Vice President Michael Escalante.

The publicly traded company--which has been buying business district high-rises at depressed prices while selling off its huge portfolio of regional malls--bought Landmark Square from a group including Los Angeles-based Cushman Realty Corp. co-founder John Cushman for about 75% of what it would cost to build it today. And the $63.8 million TrizecHahn paid Taisei for Shoreline Square factors to about 65% of its estimated replacement cost.

"We're quite happy to be increasing our presence in downtown Long Beach and the Greater Los Angeles marketplace," Escalante said. "We think we'll have lots of synergy associated with this investment," he continued, adding that TrizecHahn has already signed leases for an additional 16,000 square feet at Landmark Square since the company bought the property, and is working on still more tenant deals.

TrizecHahn bought "world-class assets in a semi-undiscovered market," said Bob Alperin, a principal at Long Beach brokerage Matlow-Kennedy Commercial Real Estate and a 20-year veteran of that market's ups and downs. The same buildings would probably be worth 75% to 100% more in the high-rent West Los Angeles or Newport Beach marketplaces, he said.

"Trizec with its global view is able to see that the gaps [between value and rent] are going to shrink over the next few years--albeit not overnight," Matlow-Kennedy principal Kimball Wasick said.

The favorable prices paid for the buildings will help the financial performance of TrizecHahn's big investment in the relatively small downtown Long Beach market, which at about 4.3 million square feet seems dwarfed by downtown L.A.'s 32 million. But the investment is still a risk, particularly considering that financial problems abroad could slow the near-term growth of the U.S. economy and hence limit demand for office space throughout Southern California.

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