Warner Center Bidding War Begins
Would-be buyers of a 50-acre real estate portfolio in the heart of Woodland Hills have made their initial offers for the collection of Warner Center office buildings expected to fetch more than $400 million. Among the contenders are some of the biggest public and private real estate companies in the nation, according to sources tracking the confidential bidding process.
Properties in the 2.3-million-square-foot Warner Center Properties portfolio up for grabs include the well-known sextet of reflective-glass high-rises along Oxnard Street, an adjacent handful of parking structures and the “low-rise” Warner Center Business Park just to the east.
Among prospective buyers contacted, only Los Angeles-based real estate investor and operator Thomas Properties Group would confirm that it is a bidder, in partnership with a private institutional client.
Also said to be among the dozen or so in the hunt are other established property operators such as Dallas-based Trammell Crow Co.; real estate investment trusts, including national behemoth Equity Office Properties of Chicago and Los Angeles-based Arden Realty; large institutional investors, including Lend Lease Real Estate Investors of San Francisco; and “opportunity funds” such as Los Angeles-based Colony Capital and Chicago’s Blackstone Group.
Opportunity funds are defined by their interest in buying properties whose value they believe they can enhance by making improvements and adding tenants before selling at a substantial profit.
As often has been the case when large properties and portfolios traded hands in recent years, several of the bidding groups pair experienced real estate operators with large capital pools. Although the bulk of the bidders made initial offers for the entire portfolio, certain teams bid just for the so-called high-rise block or the low-rise business park.
The institutional owners of the Warner Center district’s signature development--Alaska Permanent Fund Corp. and Harvard University’s endowment fund--recently engaged West Los Angeles real estate investment banker Secured Capital Corp. to find a buyer. The sellers are expected to narrow the field to a short list of finalists within a week or two before taking their best offers and negotiating a final deal. It is expected to close during the second quarter of 2002.
Just months ago, skeptical observers questioned whether more than a handful of investors would be willing or able to make a real estate investment in the $400-million range. But the relatively rare opportunity to buy such a large collection of office buildings apparently outweighs near-term concerns about the regional economy and the prospects of the West San Fernando Valley office market.
“There are probably 10 highly qualified parties” pursuing the portfolio, said one veteran real estate figure familiar with the bidding. “That’s the most we’ve seen for a major West Coast property in quite a while.”
The competition seems to demonstrate investor confidence that office rents in Warner Center will continue to rise over the long haul. The stronger the rents, the higher the portfolio’s operating income--and resale value--will be.
Supply and demand for office space in the area are considered to be in relative balance--although softened demand and additional supply on the way along the nearby Conejo Corridor have worked in tenants’ favor at the expense of landlords recently.
Warner Center Properties leasing director Don Hudson said leasing activity within the portfolio is off a bit this year, due in part to tenants’ reluctance to make commitments amid the uncertain economic climate. But the owners haven’t lowered rental rates, and Hudson, who is not involved in the sale effort, predicted good times ahead for owners of top-tier West Valley office buildings.
According to brokerage firm Colliers Seeley, the greater San Fernando Valley and Ventura County office market was flat during the third quarter, with no growth in the tenant base or average asking rents. Rents rose about 20% during the 1999-2000 period, but are likely to remain flat over the coming year.
Asking rents within Warner Center’s 25 top office properties (totaling just under 5 million square feet) average just over $30 per square foot annually, off slightly from recent quarters, Colliers Seeley says. When space that tenants hope to sublease is included, overall vacancy in these buildings climbs to nearly 15%. More than 40% of the available space is represented in the 15 floors HealthNet is vacating in one of Warner Center Properties’ high-rises.
The West Valley has seen active trading of major commercial properties in recent months. Two of Warner Center’s largest office complexes have traded hands--for $120 million and $134 million--and another large property nearby is expected to sell soon for nearly $100 million.
The Warner Center Properties portfolio, initially developed by Warner Center pioneer Bob Voit and various partners, has attracted even more investor attention to the district. The portfolio’s block of high-rises represents the kind of stable, trophy-quality real estate many institutions prefer to own.
Some potential buyers see an opportunity to get prime real estate by leveraging today’s low interest rates into a respectable immediate return on their investment. They hope to generate a 9% or 10% “yield” (a factor of purchase price and rental income), while paying 6% or 7% interest on funds borrowed to buy the property.
Some of the opportunistic bidders are motivated by the chance to boost the portfolio’s cash flow by leasing more than 300,000 square feet that HealthNet is vacating at the 20-story Warner Center Plaza I as it moves to the new LNR Warner Center complex. The landlords are asking $34 per square foot for that space.
