Here Comes the Neighborhood : Commercial Real Estate’s Upturn Signals Better Times All Around
Some of the best news in Southern California at the start of the year is that commercial real estate is emerging from a long recession. Office and industrial vacancy rates are falling and building values rising in Pasadena, the West Valley, Fullerton, Burbank, East Los Angeles, Tustin and other areas, although Downtown Los Angeles and the Mid-Wilshire area remain distressed markets.
And a major new development on the old Howard Hughes properties at Playa Vista could get off the ground this year as well.
That’s nice to hear, but most people, looking at non-rising residential values, will say, “So what?”
So plenty. As commercial real estate goes, so goes the local economy. The borrowing power of small companies rests on their factories, stores, warehouses and office buildings. “The small manufacturer typically will mortgage up to 80% of the business premise’s value,” explains James Didion, chairman of Los Angeles-based CB Commercial, the nation’s largest real estate brokerage, investment and financing firm.
But when building values decline 30% and more, as they did in Southern California’s recession, small companies, their equity gone, routinely fall into bankruptcy as federal regulators order banks to call in their loans.
Even those that avoid bankruptcy cannot use their declining real estate to raise fresh capital. Employment is hurt and the tax base shrinks.
That’s why bad times have lingered in this region and why it’s cause for celebration that commercial real estate is “turning,” in the parlance of the trade. Banks are starting to lend on real estate again--although more slowly here than in the rest of the country.
And investors from pension funds to insurance companies to real estate investment trusts are pouring money into local buildings, counting on rising rents to pay them returns of about 11% a year--roughly 3% more than the rate for 10-year U.S. Treasury bonds. That rate tells you that risks have lessened. In the earlier stage of recovery, about a year ago, venturesome investors in Southern California property earned 6% to 8% more than Treasury bonds were paying.
As always, location matters. Continued strength in the entertainment industry is helping real estate in Burbank, home of both the Warner Bros. and Walt Disney studios.
Pasadena, on the other hand, has been helped by its own conservatism: It didn’t overbuild as grievously in the booming ‘80s as did Downtown L.A., where vacancies remain high.
In Riverside and San Bernardino counties, news is even better. Business owners, either starting up or expanding, are buying foreclosed premises at 65% to 85% of their old values, reports David Feingold, vice president for realty at Citicorp.
To be sure, a region that grew on the considerable romance of real estate development--such as the late William Zeckendorf turning $2.5 million in borrowed money into $50 million by persuading Aluminum Co. of America to back construction of Century City--is seeing relatively little new development today. It makes more sense for businesses to rent or buy existing premises at bargain rates than to build new ones.
Yet this could be the year that Playa Vista, a projected 1,000-acre-plus development of multimedia industry and residential communities near Los Angeles International airport, gets going in earnest.
Developer Robert Maguire III of Maguire Thomas Partners hopes to sign a tenant for some of the project’s 5 million feet of office and studio space this year. That would get financing under way, with long-term investments hoped for from the California Public Employees Retirement System and other pension funds.
Maguire, who took over management of Playa Vista’s development in 1989, envisions the area as a center for interactive digital media. He is negotiating with Steven Spielberg, Jeffrey Katzenberg and David Geffen in hopes they will locate their proposed studio campus at Playa Vista. And he is talking with UCLA, Caltech, CalArts and USC about locating a school of new media on the site.
This is commerce on a grand scale. Maguire Thomas, developers of the Wells Fargo Center in Los Angeles and MGM Plaza in Santa Monica, have invested more than $200 million preparing plans and obtaining entitlements for Playa Vista, with no revenue to show so far. Even so, such a lengthy investment would have been impossible if the land were not owned debt-free by Summa Corp., the holding company for the estate of Howard Hughes, who was so much a part of Los Angeles’ earlier development.
Some existing structures will be used in Playa Vista’s new media center, including the studio where Hughes made “Wings” and “The Outlaw” starring Jane Russell, and the hangar where he housed the wooden seaplane Spruce Goose.
But the new development of Playa Vista, extending into the 21st Century, would create wealth beyond even Hughes’ dreams. It would help to confirm Southern California as the center of the global media industry, and it would create jobs in new industry outpacing even the aerospace business, whose decline the region has bemoaned for so many years.
Such processes are historic and mysterious. Even now new-media firms such as Digital Domain are setting up in Venice and Marina del Rey, north of Playa Vista, moving Hollywood westward to the sea.
In recent years, such grandiose visions have been more questioned than endorsed in Southern California. But attitudes are shifting again, as evidenced by Saks Fifth Avenue bidding for I. Magnin’s Beverly Hills store, by Wyndham Hotels buying the Checkers and Bel Age hotels and looking for more properties, and by investors, from here and overseas, pressing ahead with a nine-acre development called Mangrove near Little Tokyo.
In Southern California above all, so historically determined by real estate development, it’s good news that the property markets are stirring again.
More James Flanigan
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Demand and average rents--and therefore property values--for offices, factories and retail premises are rising again throughout Southern California.
Los Angeles County
Est. Est. Avg. Avg. Current 1996 Current 1996 vacancy vacancy monthly monthly Market rate rate rent* rent Beverly Hills 23.5% 22.2% $23.66 $25.76 Burbank, North Hollywood 13.3 12.0 17.92 19.51 East Los Angeles 20.3 18.3 17.98 19.68 Hollywood 18.7 19.4 14.60 15.65 Downtown Los Angeles 24.7 22.7 17.42 19.09 North San Fernando Valley 14.3 11.7 16.12 17.73 Pasadena, Glendale 16.9 16.0 17.42 18.92 Torrance, Carson 25.8 23.1 16.09 17.71 Warner Center, West Valley 16.2 13.8 19.48 21.37 West Los Angeles 21.7 21.0 20.26 21.98
Est. Est. Avg. Avg. Current 1996 Current 1996 vacancy vacancy monthly monthly Market rate rate rent* rent Coastal, Airport area 15.3% 13.0% $16.30 $16.76 Central 20.4 19.9 14.80 15.09 North 15.2 12.7 15.23 15.66 South 14.1 11.0 16.86 17.41
* Per square foot for a five-year lease on a 10,000-square-foot property
Source: CB Commercial/Torto Wheaton Research