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Wednesday, Aug 17, 2022
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The Valley’s Big Squeeze

Ask investors or developers about their San Fernando Valley activities, and you’ll likely get an answer like this: “I’m looking at a property in the Valley now, but I can’t tell you about it. I don’t want anyone else to know.” As more buyers train their sites on the region, finding properties for development or investment has become a game of stealth and cunning. A staggering volume of sales activity over the past few years has taken many properties off the market, and those that do come up for sale attract fierce competition. Some investors, particularly smaller firms, have simply moved their efforts out of town where they can still find bargain properties. Those that want to buy locally are paying top dollar and hoping that the market will continue to rise in value. Consider Agora Realty and Management, whose last local acquisition was an 80,000-square-foot shopping center in Chatsworth, which the company finished renovating a little over a year ago. “There were 18 qualified buyers for that property,” said Cary Lefton, CEO of the Sherman Oaks based development company. “We had the competitive edge because we knew the marketplace so we were bolder in the price we were willing to pay for the property.” After that deal, Lefton directed his efforts to Hawaii, where he said there were still opportunities to buy properties at rates below what it would cost to build new ones and reposition them. The company currently has $190 million worth of development projects underway in Hawaii. The median price for a retail property in the Valley rose 14 percent to $200 per square foot last year, according to the latest data from Marcus & Millichap. With demand outstripping supply, the story is similar for all property types. The relentless escalation in pricing means lower returns for investors, but that dynamic is apparently having little effect on demand. In 2005, the Los Angeles area ranked second in the nation in office product sales volume, according to research by Arden Realty Inc., second only to New York City. Nationally, a survey conducted by Marcus & Millichap and National Real Estate Investor, found that seven out of 10 private and institutional investors plan to increase their real estate holdings in 2006. “A recent property I bid on, the asking price was $8 million, and I came in at full asking and somebody offered $1 million over that,” said Mark Ossola, president of M.W. Ossola & Associates Inc. “I felt I was pushing the envelope as far as offering the full asking price. To have somebody come in and offer 10 percent above that means there’s just so much capital chasing product. Like Agora, Ossola has moved into other markets and now has $250 million worth of developments under construction in Seattle and Utah as well as the greater Valley region. Pension funds and other institutional investors have always apportioned some of their investments into real estate, but as stock market returns began to lag early in 2000, they increased their real estate holdings. And while institutional investors have not traditionally targeted the Valley, that is changing. Last year, although the vast majority of properties were traded by family trusts and small, local investors, UBS Realty Investors LLC, for instance, acquired the Warner Marketplace shopping center and late in 2004, J.P. Morgan Flemming Asset Management acquired 21st Century Plaza in Woodland Hills. In addition to those who see real estate as a sound alternative to stock investments, there are others small manufacturing companies and other businesses that want to take advantage of low interest rates to buy properties to house their businesses. Using SBA funding, they may find their costs lower than the cost to lease a property. Ideal location These groups are contributing to a burgeoning demand by businesses and investors who see Southern California, in general, and the Valley, in particular, as an ideal location. The population is growing, there is very little land to build new property and the economy is strong, all indications of continued low vacancy rates and continued strength for the leasing of properties of all types. Meanwhile, the supply is continuing to tighten. “In some sense last year may have been driven by the fact that the three-to five-year hold players could get out of investments earlier than they thought,” said Thomas P. Bohlinger, senior vice president at CB Richard Ellis, who specializes in office property investment sales. “Now a lot of properties were purchased by folks planning on seven- to 10-year holds, so it’s unlikely those will come to market for a while. As far as the Valley is concerned, there do not appear to be that many properties that are going to be available for sale this year.” Institutional investors tend to hold properties for a longer term, seven years or more. Some private investors do tend to take advantage of market conditions and sell when the selling is good. But many more private owners are reluctant to divest properties that, in many cases, they’ve held for decades. There can be substantial taxes on a property that’s appreciated, and, for those who are inclined to invest the proceeds in another property, there are few options. Adding to the pressure for potential buyers, there appears to be little in the way of new product on the horizon, especially in the San Fernando Valley. With the exception of Westlake Village, where at least 750,000-square-feet of office space is expected to come on line in the next two years, land for new development is virtually non-existent, and when developers do find it, they won’t find the process easy. Entitlement savvy “It used to be that you’d put a site under contract and have the seller come along with you for the entitlement ride and close on the property when you get your vote at council,” said Larry Scott, senior vice president at AvalonBay Communities Inc., which builds and holds multifamily apartment complexes. “The biggest change is sellers not wanting to take that risk. That limits buyers substantially to those that are very experienced in the entitlement process and those that are internally financed so that they can stomach taking on the site deal prior to the entitlements.” What development does occur along the Valley floor is likely to be focused on smaller users both because the land available will not accommodate large campus developments and because there is ready demand from that market. Some, like Voit Development Co., have already moved to take advantage of the demand for small users, and are constructing industrial condominiums on infill parcels. Many think that office condos, on similarly-sized parcels, will not be far behind. “I think the trend is going to be gearing toward office condos where smaller users can go in and buy their office space,” said Ossola. “I run into dozens and dozens of people who use Starbucks as a conference room and (FedEx)Kinko’s as a business center, and nobody wants to go into an executive suite situation. I think condos are the answer to that.”

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