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.”
In Orange County, the commercial real estate market has yet to make any great strides, said Michael Meyer, managing partner of the Newport Beach office of Kenneth Leventhal & Co., an accounting firm that specializes in real estate.
“It’s safe to say that Orange County has had a very small share of that $1 billion,” Meyer said. “There still haven’t been enough investment transactions in the county to stabilize the market.”
Meyer added, however, that the bargain price tags on buildings that became a common phenomenon here during the past two years may have disappeared. “Another bright sign is that there aren’t a lot of properties on the market, which indicates that property owners have the strength to hold on and not sell at fire-sale prices,” he said.
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.”
Times staff writer Susan Christian contributed to this report.
