Real estate investment trusts may be buying fewer properties, but that’s certainly not cooling off the sales market for office buildings in the San Fernando Valley. With the exit of the large, publicly held players, a new group of buyers has emerged. Pension funds account for some of the increased activity, but perhaps more significant is the widening pool of private real estate investors, who were elbowed out of the market when the REITs were most active. “We’ve been buying more,” said George E. Moss, chairman of the Moss Group, which last year acquired two office buildings in the San Fernando Valley. “Without the REITs in action, there are more opportunities available for individual entrepreneurs at more competitive prices.” Like Moss, many of these private players are focusing their efforts in the San Fernando and Conejo valleys, where the buildings are smaller and therefore more affordable than those in other parts of L.A., and where there has lately been more product available. “The market conditions are healthy,” said Kevin Shannon, senior vice president in the investment services group at Grubb & Ellis Co. “Rents have increased and vacancies are down, so it’s a good time to sell.” In 1999, office-building sales transactions in the Valley totaled $314.2 million, up nearly 42 percent from $221.4 million in 1998 and nearly 82 percent since 1997, the heyday of REIT activity, according to Delta Associates, a market research and consulting firm. Among the recent transactions closed by private real estate investors were a 130,511-square-foot office building bought in late January by Pacifica Real Estate Group in Santa Barbara and a 118,000-square-foot Westlake Village property acquired by Sagamore Equities LLC last summer. These private investment groups are not necessarily new to the market, but their buying power and access to capital have improved in recent years. “Private capital was always there, it’s just they were not successful because the REITs were paying lofty prices,” said Tom Bohlinger, senior vice president at CB Richard Ellis Inc. “And a ton of people have made money in the economy from IPO offerings and the stock market, and they’ve decided to diversify their investments.” When the REITs were flying high, they had easy access to inexpensive financing that allowed them to pay higher prices for properties than smaller investors could justify at market interest rates. Not only were these publicly held REITs able to use stock offerings to raise capital, they often found sellers more receptive to their bids. Because it was easier for REITs to obtain financing, sellers had more confidence in those deals. “One aspect of choosing who your buyer is going to be is not only getting the price you want, but also that the buyer on whom you spend 60 or 90 or 120 days is actually going to close,” said Brig Troy, senior vice president for Arden Realty Inc., one of the REITs that was particularly active in L.A. a few years ago. Private investors who tried to bid against the REITs found themselves at a distinct disadvantage. It took private investors longer to raise financing for a deal and the money they could raise usually did not equal the resources available to REITs. But then, beginning in 1997, REIT stock prices began to languish, curtailing their buying power. Meanwhile, the economy improved and income-property values soared in certain areas such as L.A.’s Westside, making property investments less attractive for the REITs. Because of their size and pressure from shareholders, REITs required greater returns on their investments than did private players. With a leveler playing field, these companies have quickly moved into the gap left by the REITs. “We probably picked up one or two more (buildings) than we might have otherwise,” said Michael VanderLey, a principal with Sagamore. “And in the last 12 months, we’ve been able to be a serious contender for more of those larger-size deals than we might have been when the REITs were active.” At the same time, more properties have been coming onto the market, particularly in the San Fernando and Conejo valleys. Large property owners like John Hancock Mutual Life Insurance Co. began divesting some of their real estate, either because they chose to exit the asset class or because they were consolidating their holdings. And landlords who had been holding onto their investments began to consider selling. The San Fernando and Conejo valleys were among the last areas in California to recover from the recession of the 1990s. Two or three years ago, when the REITs were most active, the dynamics that spur building sales had not yet taken place. But in the past year and a half, vacancies and rental rates have improved dramatically, encouraging sellers to put their properties on the block. The average monthly office rent in the San Fernando Valley climbed about 4 percent to $1.83 per square foot in 1999, according to Cushman & Wakefield. At the same time, the Valley’s office vacancy rate fell by more than 3 percentage points to about 12 percent last year. Buyers also point out that many of the leases for Valley buildings are about to expire, promising further rent hikes in the next few years. “You have a lot of leases written in the early to mid-’90s in the Valley, when the market was at its low point, and a lot of those leases are starting to (expire),” said VanderLey. “In some cases there is a fairly significant difference between the rental rates written into those leases and the rental rates today.” Another encouraging factor for buyers is the lack of available land to build new buildings, particularly in the San Fernando Valley.