Commercial Real Estate Makes Dramatic Recovery
From apartments in Irvine to industrial parks in Riverside to skyscrapers in Century City, Southern California commercial real estate has witnessed a dramatic turnaround after a disastrous bust that undermined prices and rents for much of the decade.
After remaining dormant for several years, commercial rents in many parts of the region are rising at about 10% annually, attracting investors from around the globe, triggering bidding wars for some properties and even prompting new construction.
“Most people, we included, didn’t anticipate the speed at which the market would come back,” said Los Angeles real estate investor Bob Lowe. “In hindsight, we all should have been investing more aggressively” during the previous years.
The revival of commercial real estate--as well as a twin turnaround in the residential market--reflects the reinvigorated economy of Southern California, where expanding companies and upstart firms are all looking for additional space to lease or buy.
The burgeoning commercial real estate business will provide an additional boost to the economy as property owners cash in on rising property values and new development generates jobs.
Building a $10-million office building, for example, translates roughly into 200 construction jobs. “These [workers] are going to spend money in the economy and that additional spending will generate additional jobs somewhere else,” said Esmail Adibi, director of Chapman University’s center for economic research.
Money from Wall Street and foreign banks is once again coursing through the region, financing all manner of real estate deals. During the April-June period alone, aggressive real estate investment trusts--an important source of funding--poured more than $400 million into the Los Angeles area, according to the CB Commercial National Real Estate Index, which tracks investment flows.
“Where there might have been four lenders active in the market, now there are three dozen lenders,” said Wayne Brandt, managing director of the Los Angeles office of Nomura Asset Capital Corp.
As rents and property values balloon, developers have dusted off long-dormant blueprints. The region’s first new commercial high-rise in nearly a decade--a 24-story tower in Glendale--has broken ground. “You are starting to see the construction cranes again,” said Los Angeles real estate consultant Stan Ross.
Despite the rising rents and optimistic forecasts, real estate observers do not expect the real estate boom of the 1980s to return. Developers remain wary of overbuilding and lenders are more hard-nosed about which projects they will finance.
“There is more restraint [from lenders] and they will not allow us to go out and build buildings where there is no demand,” said Clifford Goldstein, a partner in J.H. Snyder & Co., which is planning to break ground on office projects in Burbank and Santa Monica, markets where space is in short supply.
The recovery has also failed to make much of a difference in some markets. Downtown Los Angeles, for example, the region’s largest single office market, lags behind rival business centers with nearly a quarter of all space empty, despite some of the lowest rents in the region. Many inner-city areas have also yet to see any noticeable increase in property values or new development.
Near Marina del Rey, the grand Playa Vista project--where DreamWorks SKG plans to open a high-tech studio campus--remains mired in a high-stakes showdown between developer Robert Maguire and investors.
The real estate recovery will also prove costly for many tenants, who had grown accustomed to bargain rents and landlord concessions such as free parking. Now, in the markets where space is in short supply, many tenants will face rent increases of 20% when their leases come up, according to Ross.
The current surge in real estate values and rents is in sharp contrast to the early half of the decade, when a tough recession dramatically reduced demand for space. Making matters worse was the huge building boom of the 1980s, which left the region awash in empty office towers, shopping malls and apartment complexes.
For example, in the South Bay, where shrinking aerospace firms left a giant hole in the market, more than one-third of all commercial space sat vacant. In downtown Los Angeles, once powerful developers scrambled to fill vacant skyscrapers, some of which were sold in foreclosure sales at a fraction of what it cost to build them.
“The [commercial real estate] sector was very hard-hit,” said Tom Lieser, director of the Business Forecasting Project at UCLA. Recovery “has been delayed because there was so much space on the market.”
Southern California began to draw investors in late 1995 as a stream of economic statistics indicated that the region had bottomed out. Frank McDowell decided to test the waters in early 1996 by purchasing a few apartment complexes in Los Angeles and Orange counties.
Nearly two years later, as Southern California apartment values have jumped by about 15% and rival bidders swarm over any good-quality building up for sale, McDowell regrets that his firm did not buy more properties.
“The prices have come up a lot and we wish we had been a lot more aggressive,” said McDowell, president of BRE Properties Inc., a San Francisco-based real estate investment trust.
Southern California industrial real estate headed into recovery first, with some markets, such as those in the Inland Empire, experiencing a turnaround as early as four years ago. David C. Hasbrouck, executive director for industrial properties at Cushman & Wakefield, was surprised when two large companies gobbled up nearly 700,000 square feet of industrial and warehouse space in the Inland Empire in late 1993. Industrial rents that had plunged almost 40% quickly bounced back.
“All of the companies that had been on hold stepped in one after the other and took the larger [buildings] that were on the market,” Hasbrouck said. “That was pretty astounding.”
The turnaround has triggered a dramatic change in strategy on the part of investors and developers.
In the early 1990s, Russ Parker of Parker Properties in Aliso Viejo was busy buying suburban office buildings at half the price it took to build them. Now, Parker Properties has shifted gears and recently broke ground on a suburban office campus--the Summit--in south Orange County. The first phase is already more than half-leased and current asking rents are nearly 20% higher than they were late last year, according to Parker.
“We have gotten an awful lot of interest . . . and it will get much more intense,” Parker said.
* COMMERCIAL REAL ESTATE: Business today inaugurates special weekly pages on this key indicator of economic vitality. D1, D8-9
