In Los Angeles, as well as nationally, the fourth quarter’s big news was Blackstone Group LP’s bid for Equity Office Properties Trust.
That deal turned official last month, when New York-based Blackstone said it’s buying Equity for $39 billion. The buyout is one of the largest private equity deals in history.
That was just the beginning.
Just days later, Los Angeles-based Maguire Properties Inc. said it would pay $2.9 billion to buy Equity’s former Orange County and L.A. buildings from Blackstone.
The buildings are across OC and in downtown Los Angeles. The acquisition is set to close in the second quarter.
Maguire is buying 24 office buildings spanning 8.1 million square feet. Twenty-two of the buildings, at about 6.1 million square feet, are in OC.
Q4 Deals
In the fourth quarter, Equity sold two of its Los Angeles County holdings,Cerritos Towne Center, a five-building, 460,000-square-foot complex in Cerritos; and 3280 E. Foothill Road, a 151,000-square-foot class B office building in Pasadena.
Several other sales took place during the quarter. Broadway Partners bought a 10-property national office portfolio from Beacon Capital Partners LLC for $3.3 billion. The portfolio includes several Los Angeles trophy properties, including Citigroup Center in Downtown, 1888 Century Park East in Century City and 10 Universal Plaza in Universal City.
Hines Interests LP bought the completed portion of the LNR Warner Center project for $311 million from RREEF Funds LLC. Hines’ acquisition includes more than 800,000 square feet of office space. LNR Property Corp. is keeping ownership of two buildings totaling 500,000 square feet that are under construction in the project.
Also, Legacy Partners sold 600 Wilshire to an affiliate of Beacon Capital Partners for $67 million. The three-building complex includes a 16-story office tower, an attached two-story retail building and a two-story class C office building at 611 W. Seventh St. Legacy bought the complex for $44 million two years ago.
Realty Center Management sold Cornerstone Plaza at 1990 S. Bundy for $66 million, or $402 per square foot. The buyer was an undisclosed pension fund. The 164,061-square-foot, class A building is 91% full.
Douglas Emmett, previously a private real estate investment trust, went public, selling 66 million shares for nearly $1.4 billion. The offering is reported to be the largest initial public offering of a domestic REIT. Douglas Emmett owns 45 Southern California properties including One Westwood at 10990 Wilshire Blvd., Trillium at Warner Center and Studio Plaza in Burbank.
Construction
On the construction front, NBC Universal revealed a long-term plan to develop a 391-acre Universal City site. The project will include 335,000 square feet of office space as well as 100,000 or more square feet of retail space and 2,900 townhomes, apartments and condominiums.
Additionally, the Symantec Campus is adding 239,274 square feet of class A office space in Culver City. The two-story building is set to be completed in October.
The long-anticipated 2000 Avenue of the Stars building officially opened in the fourth quarter. This 700,000-square-foot class A project is 60% leased.
Rents Climb Up
Regional rents continued their rising trend. The overall monthly asking rate, $2.35 per square foot, was up 10% for the year.
The class A rate, $2.50, grew by 2.3% from the third quarter and by 8.8% for the year. The non-class A asking rate, $1.93, posted the greatest quarterly growth, up 5.5%, and rose 9.7% from a year earlier.
Several submarkets outpaced the region in terms of annual rental rate gains. In Fox Hills/Marina, the overall asking rent rose $2.76, up 26% for the year. The class A asking rent was $2.91, up 31%.
In Westwood/West L.A., the overall asking rent increased 24% to $3.16. This submarket’s class A asking rent of $3.27 rose 27%.
Q4 Leasing Slows
For the past four quarters, overall leasing in the region attained 15.2 million square feet, compared to 16.3 million square feet during the prior quarter and 15.5 million square feet during the fourth quarter of 2005. Class A leasing amounted to 12 million square feet, down from 13 million square feet in the third quarter and 12.3 million square feet a year earlier.
On an annual basis, several submarkets saw impressive gains in fourth-quarter leasing activity. These included Century City (46.2%), Hollywood (67.3%) and South Bay (5%). On the other hand, Westwood/West L.A. and Santa Monica posted declines of 30.9% and 19.6%.
Availability Rates
The regional overall availability rate stood at 12.1%, down slightly from 12.2% during the third quarter and from 13.9% in the fourth quarter of 2005. The class A rate, 12.5%, was down from 12.6% in the third quarter and 14.2% in the fourth quarter a year earlier. The non-class A rate, 11.1%, decreased from 11.4% in the third quarter and 13.4% in the year-ago period.
Submarket Highlights
The Tri-Cities submarket was the most active in terms of leasing activity during the fourth quarter, capturing three of the largest leases.
At the top of the list was the Walt Disney Co.’s renewal of 350,000 square feet at 3900 W. Alameda Ave. in Burbank.
Second was the renewal of 300,000 square feet at 800 N. Brand in Glendale by Nestl & #233; SA. Although large in size, both deals were downsizes of more than 100,000 square feet each.
The Federal National Mortgage Association, also known as Fannie Mae, expanded and extended its lease at 135 N. Los Robles in Pasadena, bringing its total to 61,655 square feet occupied.
Even with robust leasing activity, the overall availability rate in the Tri-Cities submarket increased by 0.5 percentage points to 10.7%. Asking rental rates were up by 57 cents in the fourth quarter to $2.57. A year ago, asking rents were $2.37.
Westside class A asking rents exceeded the $40 mark during the fourth quarter with an all-time average high of $3.34. Overall rent increased by 6.5% quarter-on-quarter to $3.28. Availability rates followed a mixed trend, with the rates for class A space dropping from 9.3% in the third quarter to 9.1%.
In contrast, the rate for class B and C space increased from 7.1% in the third quarter to 7.4%.
In Century City, Wachovia Corp. signed a 10-year lease at Northrop Grumman Plaza. The financial services company will occupy 55,000 square feet and will have building sign rights at 1800 Century Park East.
Downtown availability rates inched higher, closing the year at 18.9%. The Downtown submarket has surpassed the South Bay and now has the highest availability rates in the county. Asking rents also increased for the quarter. Class A rent stood at $2.67, and class B and C rents were $2.10. Leasing activity slowed dramatically compared to activity in the third quarter, but the total for the year (2.5 million square feet) was above the average of the past five years.
Looking Forward
Asking rents, as noted, have increased dramatically as a result of all the purchasing activity, with the influx of capital coming from Wall Street as opposed to public REITs.
With limited new supply coming online, there are not as many options for tenants needing space. Tenants that can wait may choose to hold off on any expansion plans, resulting in longer lease-up times for the higher-priced properties. The question remains as to how long it will be before demand catches up with rents.
Analysis by Studley Inc.’s research services unit.
