Shuwa’s High-End Real Estate Portfolio Draws Big Players

Teams headed by half a dozen prominent real estate investors, including Los Angeles billionaire Marvin Davis, have emerged as the leading competitors to buy the high-profile portfolio of office buildings owned by Shuwa Investments Corp., a Japanese-owned real estate company that invested heavily in U.S. properties during the 1980s.

The bidders pursuing the portfolio, which Shuwa values at $2 billion and which includes Arco Plaza in downtown Los Angeles and Taco Bell headquarters in Irvine, all have substantial California real estate holdings. They include Davis Cos., Toronto-based giant TrizecHahn Corp. and four well-heeled New York-based operations: investment banking giants Morgan Stanley and Goldman Sachs, and entrepreneurial real estate investors Westbrook Partners and NorthStar Capital Partners.

But Los Angeles-based Shuwa Investments, affiliated with Japan’s Kobayashi family-controlled Shuwa Corp., may have missed the highest point of the once-scalding commercial property investment environment now that real estate capital markets have retrenched substantially and the U.S. economy appears to be slowing.

“Having a big portfolio to sell was a good thing many months ago and in fact commanded a premium. But bigger is not better today and actually entails a discount,” said Martin Morgenstern, national managing director with Cushman Realty Corp. affiliate Cushman Investment Services.

The flow of capital to commercial real estate has been greatly restricted, particularly since Wall Street has stopped heavy buying of real estate investment trusts, which had played an active role in property purchases during the last two or three years, Morgenstern said.

Shuwa hired real estate investment banking firm Eastdil Realty to handle the sale of its 8.5 million-square-foot portfolio mostly acquired in the 1980s, when Shuwa was one of several Japanese companies that grabbed headlines for buying “trophy” real estate in the U.S. The privately held company is said to be seeking about $2 billion for the portfolio that also includes several high-rises in New York, Philadelphia, Chicago, Boston and London.

However, with the recent distress in the commercial real estate equity and debt capital markets--particularly the REIT share slump--some sources have suggested privately that the portfolio might fetch less than $1.5 billion.

An Eastdil representative confirmed that the company and its clients have received offers and are reviewing them along with Shuwa executives. The representative said neither Eastdil nor Shuwa will comment further. Representatives of all six groups said to be competing for the portfolio also declined to comment.

Sources knowledgeable about the bidding said several months of “due diligence” investigations, negotiations and perhaps some paring down of the Shuwa portfolio lie ahead before a final deal is struck. Like other Japanese groups that invested heavily in U.S. real estate during the last boom only to see values plummet with the early-1990s recession, Shuwa also has to work out terms with struggling Japanese banks that hold mortgages on the company’s properties, sources said.

Cash-strapped Shuwa in particular has been criticized for not investing in necessary maintenance and other improvements at its buildings. Hence, Morgenstern said, the eventual sale of the portfolio “would be good for all parties involved.” Shuwa and its banks will see capital freed up, and the buildings and their tenants will see needed improvements as a new owner injects additional capital, he said.

An observer close to the deal, who requested anonymity, noted that several other struggling Japanese groups will probably continue selling U.S. real estate assets in the months ahead. “I think Shuwa is the tip of the iceberg with respect to what will be available,” he said.

The competing buyers for Shuwa’s properties are:

* Davis Cos., headed by business tycoon Marvin Davis. The company has been involved in a number of substantial real estate ventures, including the development--and recent $253-million repurchase--of Century City’s Fox Plaza, where the firm maintains its headquarters. Davis groups have also been involved in development of prominent commercial properties such as Janss Court on the Third Street Promenade in Santa Monica and the Water Garden in eastern Santa Monica.

* TrizecHahn last year became co-owner of downtown L.A.’s Citicorp Center office tower and adjacent Seventh Market Place shopping mall. The publicly traded company’s retail development affiliate is the driving force behind the big Hollywood & Highland retail center that got underway last week, and its office investment group has recently acquired two of downtown Long Beach’s three most prominent office properties.

* Morgan Stanley’s real estate funds own many Southland real estate assets, including the 23-acre Grand Avenue Corporate Center mixed-use development underway in El Segundo and the Glendale Plaza high-rise under construction. It is also a major partner in the long-stalled Playa Vista planned community below the Westchester Bluffs.

* Goldman Sachs’ real estate investment group is TrizecHahn’s partner in Citicorp Plaza and Morgan Stanley’s partner in Playa Vista. It also has teamed up with several real estate operators, including industry giant Lincoln Property Co., in acquiring several Southland commercial properties.

* Westbrook Partners, headed by managing principal Paul Kazilionis, is working with other real estate groups in top-end deals that include last year’s acquisition of the 20,000-acre Rancho San Carlos bordering Pebble Beach in partnership with Olympus Real Estate Corp. Just a few weeks ago, Westbrook purchased Allstate Corp.’s nationwide investment-property portfolio--including Allstate Plaza in Glendale and Regents Square in La Jolla--for $965 million.

* NorthStar Capital Partners is headed by real estate veterans David Hamamoto and Ed Scheetz. It recently bought into veteran Southland commercial developer Don Koll’s Koll Development Co. Koll and NorthStar also teamed up to buy an office tower in Century City, where two Shuwa towers are.