It’s a Sign: Market for Commercial Real Estate Is Reviving
Like a tectonic process moving inexorably forward, commercial real estate is reviving in Los Angeles and the Southern California region even as crimes of violence and the emphasis on racial division in the O.J. Simpson trial cloud the area’s public image.
The last five years have afflicted the region with police beatings, riots, earthquakes, fires, recession and incendiary rhetoric. And yet rentals, sales and investments in office, industrial and retail properties are on the rise in Los Angeles and Orange, San Bernardino, Riverside and Ventura counties.
“There is great demand for manufacturing and warehousing space and not a lot of property available,” says George Kallis, Western regional manager of CB Commercial Real Estate Group.
New investors are coming into the market. K. Young Development Inc., the U.S. arm of Kun Young Co. of Seoul, is going to build a 400,000-square-foot office building in Glendale without advance tenants--the first “speculative” building begun in this area since 1990.
Investment from abroad will finance the building. Young Development is confident of attracting tenants from the entertainment industry, which is filling up available office and industrial space in Burbank and Glendale.
Local Armenian and Korean investors are buying dilapidated buildings in East Hollywood, looking ahead to redevelopment of that area. Properties in Huntington Park and East Los Angeles are increasing in value thanks to Latino investment.
Investors from Hong Kong and Taiwan are still pouring money into Monterey Park, Arcadia and South Pasadena, areas with large Chinese populations.
But overseas Chinese investors are also moving beyond those “comfort zones,” reports Randy Lee of Lilly Enterprises, a brokerage and investment firm, and making sophisticated investments in properties throughout the region.
In Orange County, growing small businesses in medical services and equipment have created a demand for office and industrial space that was unforeseen amid the general gloom over defense industry cutbacks.
Commercial real estate activity is important because it’s both an indicator of business confidence and an engine of future growth. “Properties rising in value make it easier for businesses to borrow, and banks to lend,” notes George Smith of George Smith Partners, a commercial broker and mortgage banker.
Still, why should investment be picking up now? Don’t investors read the headlines?
Sure, but they also look at underlying trends. Beyond the entertainment industry, which is expanding in all its forms, international trade is growing rapidly. Computer parts leave for Asia, are assembled and return through local ports and airports, creating work in manufacturing, transportation, distribution and finance.
Trouble is a relative term. “We sometimes feel our problems, such as earthquakes, are unique,” Lee says, “but we dealt recently with an investor from Peru who said, ‘Oh, earthquakes, we get a lot of them in South America.’ ”
To be sure, the clouds may be parting, but they are not dispelled. “We’re ending an unprecedented recession; banks are only now finishing up their sales of repossessed real estate,” says Smith.
Downtown Los Angeles remains overbuilt; the Mid Wilshire area has yet to recover. Office vacancies in Ventura County are still at 16%.
On the other hand, retail space is moving briskly in the San Fernando Valley. Office buildings in the Irvine Spectrum are 94% filled, and warehouse space in San Bernardino and Riverside counties is at a premium.
The phenomenon of people and companies leaving Southern California is slowing and will reverse itself with the return of economic growth, says Professor Stuart Gabriel of USC’s business school.
Straws in the wind: Last month an investor bid $38 million and closed a deal within 24 hours for an apartment building in the Wilshire Corridor, west of Beverly Hills. The building had changed hands in the 1980s for $75 million, and it would cost $76 million to construct today.
Those numbers mean it’s time to invest, says Edward Abbott, managing director of San Francisco-based Abacus Fund, who is investing in California real estate for the first time in decades.
Pension funds and institutional investors come in when properties are at 50% of replacement value, Abbott explains. In Southern California today, investors are looking for a 9% annual return in rental income and 50% or greater appreciation in value over the next five years. Financial markets are making money available for the high stakes game. Banks are eager to lend, and local real estate finance companies, such as Colony Capital Advisers and Secured Capital, are devising mortgage-backed securities for commercial properties.
Still, the driving force in commercial real estate’s revival is not numbers but entrepreneurial immigrants and newcomers who see promise in the region, says Abbott.
And to know why they’re enthusiastic, you only have to ask why they came.
Armenians had lived in Tehran for 400 years, until the Ayatollah Khomeini in the 1970s threatened discrimination. So the Armenians came to Glendale and prospered.
Chinese money will keep coming here as long as Beijing’s Communist government threatens Hong Kong and Taiwan with political discrimination.
Latino and Asian immigrants alike came to escape poverty and discrimination in class-ridden societies.
Now each group in its own way is contributing to a mighty future that is building in Los Angeles and Southern California, even as emphasis on division clouds our view of the mountains.
* L.A.’S IMAGE: Japanese alter their perception. D2
