Gas Company Tower is one of the buildings MPG will sell to Brookfied. MPG… (MPG Office Properties )
Five of the 10 tallest skyscrapers in Los Angeles will soon be controlled by a Manhattan real estate company in one of the biggest shake-ups of the downtown commercial real estate market in decades.
Brookfield Office Properties Inc. has agreed to pay about $430 million for four prominent buildings on the urban skyline, including Gas Company Tower and Wells Fargo Tower on Bunker Hill.
The pending deal would mark the end of MPG Office Trust Inc., one of Southern California's most celebrated office developers. The debt-laden firm has been struggling for years. Just last month MPG agreed to sell another of its trophies — U.S. Bank Tower, the tallest building in the West — to foreign investors.
If Thursday's transaction is ratified by MPG shareholders as expected this fall, Brookfield would become the dominant operator of prime space in the city's financial district and would play a major role in setting office rents in downtown Los Angeles.
Real estate veterans call it a game changer for the downtown office market, giving one big player the chance to call most of the shots because it would own seven office properties totaling 8.3 million square feet.
"Brookfield buying the rest of MPG's portfolio is like putting together Chrysler, Ford and General Motors. It's that impactful," said John Cushman, the Los Angeles-based chairman of real estate brokerage Cushman & Wakefield. "They will totally control the high end of the market."
One of the nation's savviest and best-capitalized real estate firms, Brookfield has the money to make the MPG buildings more attractive to renters, Cushman said. Cash-strapped MPG has been hard-pressed in recent years to maintain its properties and upgrade office space to satisfy increasingly demanding tenants.
Founded by Los Angeles developer Robert F. Maguire in the 1960s, MPG was for decades the best-known builder of top-quality office space in Southern California. During the real estate boom of the mid-2000s, it paid top dollar for a large portfolio of premium properties, mostly in Orange County.
But that expansion backfired when the economy tanked. The firm owed billions of dollars in mortgages at a time when many of its tenants were shrinking their offices, going out of business or begging for rent reductions.
Maguire left the troubled company in 2008 after a contentious battle for control. The company's name was changed from Maguire Properties Inc. to MPG in 2010.
Since then it has been selling buildings or letting them fall into foreclosure to stay afloat while looking for suitors who might step in with a rescue plan.
Brookfield was a logical buyer for MPG. It already owns a number of high-profile office buildings in Los Angeles, including 777 Tower and Bank of America Plaza. It also owns the Fig at 7th shopping center and a nearby development site downtown.
"Brookfield had been down on one knee in the past, but MPG finally said yes this time," said Irvine real estate analyst Michael Knott of Green Street Advisors.
Knott said the deal is "transformative" for downtown L.A. because it will give Brookfield command of buildings preferred by lawyers, accountants and other white-collar professionals who want to be at the heart of the city.
Still, Brookfield will be challenged to fill those buildings with paying tenants. Even after a decade-long residential boom and the renaissance of downtown's restaurant and night life scene, landlords have had a difficult time keeping their office buildings full.
Although many firms are growing again as the economy recovers, it has become common for them to house more employees in less space as improvements in technology make workers more mobile and reduces the need to store bulky paper files.
Under terms of the deal, holders of MPG's common shares will receive $3.15 per share in cash at the closing of the merger. The per-share offering price represented a 21% premium to MPG's closing share price of $2.60 on Wednesday.
The buyer will be a new fund controlled by Brookfield called DTLA Holdings that will own the former MPG properties and Brookfield's current assets downtown. Brookfield has also offered to buy MPG's outstanding preferred shares for $25 a share and assume about $2 billion in debt owed by MPG.
"Following a lengthy and exhaustive search, we have found a strategic buyer who has the capital and the market presence to appreciate the potential long-term value of our assets," said David Weinstein, chief executive of MPG.
The transaction is not a fire sale, said analyst Craig Silvers, president of Bricks & Mortar Capital.
"I think it's a fair price because there are a limited number of buyers for this size of a portfolio and its particular location," he said. "There is a recovery going on and no one told downtown."
MPG shares closed up 53 cents, or 20.4%, at $3.13 on Thursday, just below the expected sale price. Investors may be waiting to see whether shareholders will force Brookfield to raise its bid or whether another bidder might swoop in with a higher offer, Silvers said.
"The market is saying this bid is a little too low," he said.
Shares of Brookfield's parent company closed up 52 cents, or 3%, at $17.95