Japanese Dynasty in L.A. Properties Falls on Hard Times

More than a decade ago a little-known Japanese builder and investor, Shigeru Kobayashi, was well on his way to creating a new dynasty in American real estate.

During a headline-making shopping spree in 1986, Kobayashi’s real estate company, Shuwa Investments Corp., purchased about $1 billion in U.S. property, including office towers in Los Angeles, New York and Orange County. In just a few short years, Shuwa’s American holdings totaled nearly $3 billion.

But Shuwa’s bold plunge into U.S. real estate has turned into a humiliating retreat, with the company trying to sell off a portfolio that has by some accounts lost about half of its value. In addition to mounting financial pressures, the firm is grappling with the recent suicide of one of its top Los Angeles executives, Kiichero “Kichi” Kobayashi, whose body was found alongside a country road in Central California.

Kiichero Kobayashi, a nephew of the company president and the second-in-command of the Los Angeles office, hanged himself only a few days before a widely read Japanese tabloid published an account of his relationship with a missing Los Angeles bar hostess. The young woman lived in a Beverly Hills condominium reportedly owned by Kiichero and drove a new Mercedes purchased with his assistance.

The suicide and massive liquidation are part of a long, downward spiral for Shuwa, which has suffered from plunging real estate values, lawsuits and strained relations with its American employees. It didn’t help matters that even minor operational and leasing decisions often had to be reviewed by Kobayashi family members in Los Angeles and Tokyo, leaving the company slow to respond to changing markets and tenant needs.

Shuwa’s financial pain is shared with the many other Japanese investors that plunged into U.S. real estate markets in the latter half of the 1980s, buying landmark office buildings, hotels and golf courses only to watch their value plunge. After avoiding the inevitable write-downs for years, many of those Japanese investors, like Shuwa, are finally auctioning those properties at a discount.

But the Shuwa story may be the most graphic example of the wreckage from Japan’s ill-fated investments in U.S. real estate.

Shuwa’s sluggishness--and its lenders’ reluctance to write off loans--may have led it to miss the peak of a real estate trading frenzy for large commercial properties last summer. But even before the market cooled off, bids for Shuwa’s entire U.S. portfolio--which totals about 8.5 million square feet--remained below $1.5 billion--or nearly half of what the company paid for the assets, according to people familiar with the negotiations.

The campaign to sell all or part of Shuwa’s U.S. portfolio has made the company even more difficult to negotiate leasing deals with, say real estate brokers.

“They are not out there chasing and aggressively pursuing deals,” said Whitley Collins, a commercial real estate broker with CB Richard Ellis.

Shuwa officials in Los Angeles failed to respond to several requests for interviews.

The company began its initial foray into American real estate in the late 1970s when Shigeru Kobayashi, president of Tokyo-based Shuwa Corp., sent his son, Takaji, to the U.S. to develop and build condominium and apartment complexes. With its U.S. headquarters in Irwindale, Shuwa’s U.S. subsidiary remained a low-key player that failed to generate much profit or attention.

But in the mid-1980s, Shuwa, enriched by the skyrocketing value of its Tokyo real estate holdings, joined a parade of other Japanese investors who paid top dollar for relatively inexpensive U.S. properties. In August 1986, Shuwa stunned the real estate world by buying Arco Plaza--twin, 52-story towers in the heart of downtown Los Angeles--for a whopping $650 million. Shuwa later moved its U.S. headquarters to the landmark complex.

Some brokers credit Shuwa for driving the 1980s boom in property values and surge in downtown development. Before Shuwa arrived, there were few large investors or Wall Street funds interested in purchasing office buildings in downtown Los Angeles, and the handful of Japanese investors in the market were purchasing much smaller buildings, says Dick Schnell, an executive vice president with Cushman Realty Corp.

“They were buying buildings at aggressive prices before anyone else was there,” Schnell said.

It didn’t take long, however, for Shuwa to run into trouble. Differences in culture and business practices strained relations between the company and its American employees, many of whom complained about their lack of control and authority. At one point, no employee could issue a check for more than $500 without first getting the signature of the elder Kobayashi, who remained in Tokyo.

“I think most of the Americans did not feel valued or respected,” said Clay Dunning, who was hired by Shuwa in 1990 to create a management team to run its U.S. portfolio. Some of the employees “found it difficult to deal with the relatively slow--sometimes very slow--approval process. Some found it difficult to understand various decisions that were made, finding them illogical or inconsistent.”

In 1989, some of Shuwa’s top U.S. executives, including Takaji, were sued by two employees, one who claimed that he was beaten and verbally abused and another who alleged that she was sexually harassed.

Meanwhile, the once-roaring Japanese real estate market--the source of Shuwa’s wealth--fell into a deep depression, ending the company’s U.S. expansion and taxing its ability to keep up with debt payments. The value of Shuwa’s U.S. portfolio also shrank dramatically in the wake of a nationwide real estate bust, which sent property values plunging and vacancy rates soaring.

Tenants, meanwhile, were put off by Shuwa’s reputation for being reluctant to upgrade buildings and to offer better leasing terms even as real estate markets weakened. A former manager recalled how tenants complained when Shuwa turned off the lights at 6 p.m. in one of their buildings.

“As the real estate market declined . . . a number of layoffs were made, budgets were cut and times were lean,” Dunning said. “Morale dropped. As our industry recovered, many people were recruited away.”

In the last year, with the U.S. commercial real estate rebounding strongly, Shuwa tried to take advantage of the turnaround by putting its entire portfolio on the market. However, Shuwa started seeking bidders just as real estate investment trusts--the primary buyers of major commercial real estate properties--cut back on spending in the face of weakening stock prices. In addition, last summer a major source of real estate capital--mortgage-backed securities--temporarily dried up amid worldwide financial turmoil.

The few bids Shuwa received for its portfolio fell far below its expectations. Currently the company is negotiating with prospective buyers interested in portions of the portfolio or individual properties.

Many tenants are growing impatient with Shuwa, real estate brokers say.

“They are at risk in losing existing tenants because they do not have the capital to reinvest,” Schnell said. “To entice tenants, you have to spend money for tenant improvements. If you are unable to do that you aren’t competitive in the marketplace.”

During its efforts to sell its U.S. holdings, Shuwa employees were shocked in late January to learn of the suicide of Kiichero Kobayashi, the second-in-command at Shuwa Los Angeles. After a lengthy, rambling drive from Los Angeles, Kiichero parked his Lexus sedan next to an empty pasture in rural San Benito County, stepped outside and killed himself, authorities say.

A local resident found the 42-year-old executive slumped against the passenger side door, hanging by a necktie that was looped around the top of the car’s door jamb. He had bandages from a recent attempt at slashing his wrists.

The death was ruled a suicide, and there were no signs of foul play, according to police and coroner officials.

The executive’s self-destruction seems totally out of character for a man many former employees describe as unflappable.

Kiichero served at the whim of his boss and cousin, Takaji, known as “TK” among employees, some of whom recall seeing Kiichero break into a run to pick up such mundane items as cigarettes or a hamburger for his cousin.

“He was an upbeat person and very loyal and steadfast,” said Dana Traversi, who headed leasing for Shuwa from 1989 to 1995. “To think he could do that is mind-boggling. He never snapped and he was never out of arm’s reach for the phone to TK.”

Only three days before his death, Kiichero was interviewed by the Japanese publication Bunshun. The weekly tabloid was preparing a three-part series on the disappearance of Reiko Agawa, a young Japanese woman who worked at a now-defunct Los Angeles bar.

Kiichero reportedly gave Agawa’s friends and family different accounts of her location. In some cases, he said Agawa was vacationing in Mexico. He told others that she was in Canada working with his lawyer on extending her visa.

In an interview with the magazine, Kiichero said he believed Agawa might be traveling in Europe, based on what she said during their last meeting. “She didn’t disappear, she left of her own free will,” he said.