Opportunity is still knocking for many of Orange County’s most active commercial real estate investors of the past five years, but it has required a decided shift in strategy.
“We’ve gone through the opportunistic phase” of the current real estate cycle, said Carter Ewing, managing partner for Aliso Viejo-based industrial property developer and investor CT Realty. “We’ve had to evolve.”
That’s a common refrain of investors looking for deals in Southern California’s strengthening commercial real estate market.
Lender-driven sales in the area are slowing to a trickle, and institutional investors across the country and other parts of the world are plowing money into local deals and driving up prices.
The changes have taken away some key sources of acquisitions for companies like CT Realty, Irvine-based LBA Realty, and the Santa Ana office of Dallas-based Lincoln Property.
Those companies thrived during the carnage of the last real estate crash, picking up bank-owned, distressed, and largely vacant area properties on the cheap, leasing them out, and then selling them for big profits as the market improved.
Those types of deals are in shorter supply today. Bank-owned and other lender-driven property sales made up less than 10% of area office sales in the past six months, according to brokerage data, down from nearly 50% four and five years ago.
More fully leased buildings with stable ownership are also harder to acquire now. Orange County has become a key target market for pension funds, insurance companies, and other institutional investors, making it more expensive to buy properties that might otherwise be undervalued due to lack of competition.
For the industrial market in particular, “the market returned quickly,” said James “Watty” Watson, CT Realty’s chief executive. “We’ve had to move from being an opportunistic (buyer) to developing ground-up buildings” and buying fully leased buildings.
This year, the company brought on board Keith Ross, the founder of Irvine-based developer Centra Realty Corp., to head a development push. The company recently raised about $200 million that will be used to buy land to build midsize industrial properties—75,000 square feet and smaller—“within an hour” of OC, Ross said.
CT Realty is also proceeding with a handful of larger industrial developments under way in the Inland Empire and Texas.
Deals now are typically more “market-driven rather than opportunity-driven,” Watson said.
Office Angle
Opportunistic investors more focused on the office market, where the local recovery isn’t as far along as in the industrial sector, may have to wait another few years before speculative development makes economic sense.
There are other routes to making a smart value-add investment today, based on recent sales said to be in the works involving LBA Realty, one of the area’s most active investors in the past few years.
LBA made a number of well-timed investments in area properties during the downturn, in particular the purchase of the bulk of the Park Place mixed-use campus in Irvine in a pair of deals in 2009 and 2010.
Park Place offices had a glut of empty space at the time of the deals, space that was subsequently filled by LBA with big tenants such as Western Digital Corp. and St. Joseph Health.
The privately held investor’s latest push, rather than the purchase and filling of empty buildings, appears to be aimed at buying fully occupied offices, albeit ones that might not stay full for long.
It is close to buying a prominent Culver City office building that’s leased to Sony Pictures Entertainment, according to real estate sources.
Sony Pictures Plaza, an eight-story, 338,700-square-foot office building at 10000 W. Washington Blvd., was listed for sale earlier this year by Transpacific Development Corp.
LBA is the winning bidder, and a deal is expected to close this month, according to sources familiar with the imminent transaction. The company is expected to pay about $159 million for the office, or $470 per square foot.
Brokers with the El Segundo office of CBRE Group Inc. have the listing but couldn’t be reached for comment. The property is listed on CoStar Group Inc. records as being under contract.
Sony Pictures Entertainment leases the entire building under a deal that runs through 2027, but it has the option to terminate the deal at the end of 2016 and is expected to do so.
The building houses about 1,000 Sony employees who work in the studio’s home entertainment division and corporate services. It’s next to a Sony Pictures studio, where the entertainment division is likely to relocate to in 2017.
LBA’s planning to reposition the building as a core location in the West Los Angeles office market, which is getting heavy demand from entertainment, tech and other industries, according to sources.
The rents Sony is paying at the building are about 22% below market rates, according to CBRE’s marketing package for the property.
A similar strategy appears to be playing out for an office LBA bought in May, one of the two Aliso Viejo offices owned by computer giant Dell Inc., at 5 Polaris Way, that sits just off the San Joaquin Hills (73) toll road.
Terms of the sale for the 78,702-square-foot office weren’t disclosed. It was one of two in Aliso Viejo that Dell took over as part of its $2.4 billion buy of Quest Software in 2012.
Quest, which had been based in Aliso Viejo, paid a reported $14 million for the office about a decade ago.
Dell will lease back the property from LBA for about 18 months, according to a recent brokerage report by Savills Studley. Plans for the office after the lease has been completed haven’t been disclosed.
Institutional Sales
LBA continues to benefit from other national investors’ increased interest in OC properties as it looks for new types of purchases.
The company completed the sale of Oracle Tower near John Wayne Airport in Irvine last month.
The buyer was Toronto-based Manulife Financial Corp., which is best known in the U.S. for its John Hancock Life Insurance Co. division.
The 12-story office is believed to have sold for nearly $95 million, making it the priciest single-building office sale in OC reported this year.
It is Manulife’s second recent local trophy office buy; the company paid $277 million for the 19-story Michelson tower in Irvine in 2012.
LBA bought out its financial partner in the Oracle building four years ago, giving the company full ownership. Real estate sources estimate the 2010 deal made in a down market valued the building closer to $55 million.
The local office of Lincoln Property, like LBA, has made its own series of profitable office flips in OC over the past few years.
A partnership between Lincoln and Chicago-based GEM Realty Capital Inc. sold the three-building One Pacific Plaza office complex in Huntington Beach in May
for about $95 million to an affiliate of Parsippany, N.J.-based Prudential Real Estate Investors.
Lincoln Property and GEM paid about $76 million for the complex—then known as Bella Terra Towers—in October 2011 when it was operating out of receivership.
A similar deal took place the prior month when Lincoln and partner Angelo, Gordon & Co. sold Griffin Towers, a two-tower office complex in Santa Ana, to an affiliate of private equity firm Blackstone for $129 million.
Lincoln and Angelo, Gordon paid a little less than $90 million for the South Coast Metro property in 2010.
Lincoln, with deals like Griffin Towers and One Pacific Plaza harder to come by these days, is now trying its hand at redevelopment projects of retail and office properties it owns in OC and of properties it manages for other investors.
The company is now managing the redevelopment of Anaheim Corporate Office Plaza, a five-building business park across the street from Angel Stadium.
The property, owned by Southfield, Mich.-based Seligman & Associates Inc., will get a nearly $10 million makeover beginning early next year, turning the office park into a creative-office campus to be called Axis.
The plan is to turn the nearly 30-year-old buildings at the 300,000-square-foot campus into high-end creative space.
Lincoln is also planning a redo of Michelson Marketplace, which it recently acquired in Irvine for $13 million.
The company is planning to turn the 32,560-square-foot retail center near the intersection of Michelson Drive and Von Karman Avenue into a smaller version of the Anaheim Packing House and other food halls that have recently popped up in OC.
