National Study Rates L.A. Best Place for Investment

Los Angeles’ sharply rebounding commercial real estate market is viewed as the best place in the country for investment over the next two years, according to a recent study.

Members of the Washington-based Urban Land Institute, a real estate policy and planning organization, rated Los Angeles the top place in the nation to buy property because of its robust housing market and surging economy. Following Los Angeles were San Francisco, New York, Seattle and Boston.

Southern California real estate executives say they are not surprised that the national investment community, which makes up ULI’s membership, sees Los Angeles as an investment darling. It was one of the last areas of the country to emerge from the recession and has more room to improve and thus more profit potential.

“Investors are looking for the place they’ll get the biggest yield, and because of where Los Angeles has been the last seven or eight years, it’s logical that they would look here,” said William Rothman, a managing director in Bank of America’s commercial real estate services unit.

Investors such as William McMorrow, chairman of Santa Monica-based Kennedy-Wilson Inc., recall buying prime office space on the Westside for $75 a square foot just three years ago. Those buildings are now selling for more than $200 per square foot, he said.

Buyers are willing to pay those prices because they think the prospects are bright for Southern California businesses. Employment is on the rise, and the region’s job base is much more diverse, relying as much on high tech and entertainment as it does on such old-line industries as banking and aerospace. Demand from expanding companies has pushed rents up in most markets, and rents are expected to surge even higher over the next few years as available space diminishes.

For instance, a former aerospace office building in El Segundo, purchased by Kearney Real Estate Co., is lining up high-tech-related firms willing to pay 10% to 15% more in rent than just two years ago, Kearney President James Brooks said.

But the biggest investors in Southern California real estate in the last year or two have been real estate investment trusts. These firms are expected to continue fueling the investment boom over the next few years.

“As long as interest rates don’t go up too much, REITs will own all of the institutional-quality property here over the next 10 years,” Brooks said. “They’ve got a very low cost of funds and a lot of capital to spend.”