By Nidal Ibrahim
Irvine-based Passco Real Estate Enterprises Inc. recently wrapped up one of the bigger retail deals of late in California.
Passco paid $95 million for the 247,833-square-foot The Promenade at Howard Hughes Center in West Los Angeles.
The mall was sold by the developers of the mall,a venture of J.H. Snyder Co. and Orix Real Estate Equities.
More than 90% of the retail tenants are national or regional operators. Anchoring the center is the 17-screen “The Bridge” movie theater, which includes an Imax screen. Other anchors include Borders Books and Music and Nordstrom Rack.
Reza Etedali, president of Reza Investment Group in Irvine, represented both sides in the deal.
Passco is one of the top tenant-in-common players. The company pools investors to buy real estate,typically after they’ve just sold another property.
Doing so helps them defer paying capital gains taxes under a section of the tax code dubbed “1031.”
The Promenade sale, meanwhile, highlights several real estate trends, Etedali said.
For the past several years, apartment buildings and industrial properties have been the darlings of investors. More recently, office buildings have become more popular, with the sale of several high-profile towers in Newport Beach and Irvine among the most prominent deals.
Retail, however, has remained the relatively quiet sideshow, providing consistent returns for investors.
“In the late ’90s we had to almost apologize for being in retail,” Etedali said. “A lot of people thought dot-coms would take over everything and you’d have to shop on the Internet for everything. When the dot-coms crashed, everybody realized retail is here to stay.”
Still, fascination with the dot-coms led developers to shy away from retail, which meant that fewer shopping centers were built during this period.
In general, cap rates for top retail malls are in the high-5% to mid-6% range, Etedali said. That compares favorably with apartments, where stiff competition for properties has pushed cap rates down to the mid-4% to mid-5% range. (Cap, or capitalization, rates measure the value of future income from a building relative to its sale price.)
Office, given that it has lagged most of the other sectors, now is on a nice upswing, with cap rates of 7% to 8%, Etedali said.
The other interesting trend shown in Passco’s The Promenade buy is that retail is much more of an active market in Los Angeles than Orange County, Etedali said.
That’s partly explained by the fact that retail is more mature in Los Angeles. Another factor: OC retail historically has been owned by longer-term investors, Etedali said.
“In Orange County as a whole there’s still a lot of transactions, but Los Angeles seems to have more of a turnover,” Etedali said. “Orange County is viewed as a very stable and strong market and people tend to keep their properties here.”
And, “Orange County, because a lot of it is masterplanned, has historically been favored by the institutional players,” who tend to hold investments, he said.
Etedali is focusing on the next big deal on his plate,also in Los Angeles. Etedali expects the roughly 800,000-square-foot Crenshaw Mall to sell for about $150 million or so.
San Juan Surprise
The push into office continues,even in San Juan Capistrano, which isn’t known as an office hub.
Centra Realty Corp. is moving forward on plans for its 17.8-acre Ortega Ranch development, which is set to include 144,000 square feet of office, research and development and retail space. Some 100,000 square feet is marked for office space.
The Irvine-based developer also plans to build a 44,000-square-foot office project dubbed Valle Ranch in San Juan Capistrano.
The city has seen just a handful of office projects in the past six years, according to Dave Travis, a senior vice president with Voit Commercial Brokerage LP.
Davis, who will handle leasing for the project along with fellow Voit Commercial broker Tim Walker, said demand for office space in San Juan Capistrano is very competitive, a result of a vacancy rate that hovers around 1%.
Strong demand coupled with a dearth of available land for new development has produced one of the tightest office markets in the county, Davis said.
Ortega Ranch, at the northwest corner of Ortega Highway and Rancho Viejo Road, will include 12 buildings, including eight office buildings ranging from about 5,600 square feet to 32,100 square feet.
The development also includes two research and development-flex industrial buildings,8,700 square feet and 12,700 square feet in size.
In the center of the development, Ortega Ranch will have a pair of retail buildings of some 4,500 square feet to 7,200 square feet.
Construction on the $55 million Ortega Ranch complex started in May and is expected to finish in February.
Valle Ranch is at the corner of Valle Road and the San Diego (I-5) Freeway. The development is set to include three office buildings. Five spaces for tenants will range from 8,500 square feet to 9,700 square feet.
Ibrahim, publisher of Arab-American Business, is filling in for real estate reporter Mathew Padilla, who is on vacation.
