Sam Zell-Led Group Buys L.A. High-Rise

An investment group led by real estate magnate Sam Zell on Tuesday announced the purchase of one of the largest skyscrapers in downtown Los Angeles--at a price believed to be a small fraction of what it cost to construct the 52-story building in 1992.

The buyer of Two California Plaza is a real estate investment fund managed by Zell’s Equity Office Holdings, which buys primarily distressed properties at bargain prices. Equity Office holdings did not reveal the sales price, but a number of downtown real estate brokers estimated it at $90 million to $100 million.

The Bunker Hill skyscraper, which was taken over by lenders last year after suffering from low rents and a high vacancy rate, was built for an estimated $326 million.

Representatives of the new owners said they are confident about the future of the 1.27-million-square-foot building despite the scheduled departure of its largest tenant, the Metropolitan Water District, three years from now. MWD occupies about a third of the building. Spokesmen for the buyers said they expect to be able to fill the vacated space with little trouble.

The purchase “demonstrates our faith [in the downtown market] and our belief that there is great opportunity here,” said Dawn Mansfield, regional leasing director for Equity Office in Southern California.

The building, which is Zell’s first acquisition downtown, is about 85% leased, which is considered a high level of occupancy. Last week the corporate parent of Aames Home Loans said it would relocate its corporate headquarters and about 700 employees to the building next year.

Other brokers interpreted the building’s sale as a good sign for the long-struggling downtown office market, which suffered from the region’s economic recession and a bout of overbuilding.

The sale to Zell and the building’s high occupancy rate “gives a sense that the market has settled down,” said Kathryn Schloessman, manager of the downtown Los Angeles office of real estate brokerage CB Commercial.

Many downtown brokers and landowners long blamed the nearly simultaneous construction of Two California Plaza and several other large skyscrapers in the early 1990s for throwing the market into a downward spiral, as landlords slashed rents to raid one other’s tenants.

“It was pretty clear [when construction began] that we were overbuilding,” said real estate investment advisor John Gordon. “But everybody was jumping on in and ignoring some pretty obvious signals.”