IPOs a Litmus Test for Area’s Rebounding Office Market

How well is Southern California’s commercial real estate recovering from its recession? Two companies issuing their first stock to the public might well be proxies for finding out.

One is Arden Realty Group Inc., which owns 21 suburban office buildings in Los Angeles County, two in Orange County and another in San Diego. The other is CB Commercial Holdings Inc., a major commercial realty brokerage based in Los Angeles that does 30% of its business in California.

After both go public, their stocks’ performances could be gauges of how well real estate--a heavy anchor on the general economic recovery--is improving. Few sectors of the local economy have illustrated Southern California’s recent woes more than the office market, where prime space went begging, average vacancy rates soared to nearly 20% and rental rates plunged as the recession took hold in the early 1990s.

In the last 18 months, however, the office market has gradually improved along with the rest of the economy and, to hear Arden and CB Commercial tell it, conditions are likely to keep getting better.

They aren’t alone. Beverly Hills-based Arden decided to go public after rejecting several proposals from outside parties that wanted to buy the company, according to people familiar with the company’s plans.

Arden President Victor J. Coleman confirmed Monday that his firm received more than one buyout offer, but he declined to identify the suitors or the amount of their bids.

Current trends “will continue to create a favorable economic environment in the suburban Southern California office markets,” Arden says in its prospectus. CB Commercial likewise cites the “recovering markets” as among its reasons for going public.

What trends? The office market deteriorated so badly during the recession that few new offices are being built in the area today, so the supply of office space is stable.

Simultaneously, demand for office space is getting stronger because the resurgent economy is improving the fortunes of local businesses. That’s pushing vacancy rates lower and nudging rents higher.

But won’t the rising demand for office space spur builders to erect more offices? Unlikely, Arden argues, because rents are still much too low to cover the expense of constructing new office buildings.

Arden’s office properties, spread evenly throughout the region, include sites in Beverly Hills, Westwood, Westlake Village, Glendale, Pasadena, Long Beach, Huntington Beach, Anaheim and San Diego. The company’s 1995 revenue totaled $11.7 million.

Its offering of 18.8 million shares is expected to fetch roughly $20 a share, and raise about $350 million in net proceeds for the company. Trading the stock is expected to begin as early as this week.

Arden also plans to become a real estate investment trust, or REIT. As such, it would avoid taxation at the corporate level in exchange for distributing 95% of its profit to its stockholders.

The much larger CB Commercial, meanwhile, is a 90-year-old concern that considers itself the nation’s biggest independent provider of commercial realty brokerage and loan originations.

With 1995 revenue of nearly $469 million, CB Commercial is the former commercial arm of realty giant Coldwell, Banker & Co. In 1989, when Coldwell Banker was owned by Sears, Roebuck & Co., a group led by CB Commercial Chairman James J. Didion bought the CB operation from Sears. (Sears subsequently divested the rest of Coldwell Banker as well.)

Although CB Commercial’s prospectus did not say how many shares it plans to sell or at what price, it did state that the firm hopes to raise up to $86.3 million from the sale. Trading in the stock is unlikely to start for several weeks.

Despite the positive trends in commercial real estate, there are reasons why Arden and CB Commercial could give investors pause.

Even as California’s recovery has gained steam, office space generally has remained ample. In Los Angeles County, the vacancy rate as of year-end 1995 remained at a troublesome 17%, down only two percentage points since peaking at 19.2% in 1991, according to a Cushman & Wakefield study used by Arden in its prospectus.

“Even though [rental] rates seemed to have firmed up, generally I would characterize it [the market] as still soft,” said Nima Nattagh, a real estate analyst for Experian Corp., the information-services group recently divested by TRW Inc.

Also, recent numbers posted by Arden and CB Commercial are nothing to brag about.

Arden lost $2.7 million in the 18 months ended June 30. CB Commercial, after losing $166 million in 1991 through 1993, turned a $9.2-million profit in 1994, but its earnings the next year fell 20% to $7.4 million.

CB Commercial has done better this year, and one of the big drains on its profit--its debt load--would be whittled down with proceeds from the stock sale.