Real Estate Stars Are Brightest in Cloudy Climate By SHELLY GARCIA Senior Reporter Equity partners were risk averse. Neighbors were testy. Companies were closing or consolidating, and tenants weren’t budging. For brokers, developers and landlords alike, getting anything done in real estate in 2002 was tougher than it’s been in years. The San Fernando Valley Business Journal’s special report on commercial real estate, “Best Moves, Top Movers,” highlights transactions and projects that would have been noteworthy in any year, but the past year’s difficulties make these successes all the more impressive. Consider the development environment. “It’s taken more upfront money to get these projects on track, longer periods of time entitlements and the political process has become much more complicated and investors are much more demanding in terms of their wanting to eliminate the risk as much as possible,” said Larry Kosmont, president and CEO of real estate consulting firm, Kosmont Cos. in L.A. Developers with speculative projects, Kosmont said, “were as popular as a one-armed paper hanger” last year. And if a developer could find funding and tenants, there were still the neighbors to contend with. Last year, the city of Agoura Hills rose up and passed a law that prohibited the building of a Home Depot, a move that underscores the increasingly aggressive stance neighborhoods are taking on development of many kinds. Developers last year began spending much larger amounts of time working with cities and communities to ease the way for their projects. Many now include in their development budgets the cost of contributing to neighborhood projects as a way to foster good will. The going wasn’t any easier in the leasing arena. Warner Center Plaza, with arguably some of the most attractive office space to be had in the San Fernando Valley, lumbered along with more than 300,000 square feet of space available. Worse yet, any landlord with space available was likely competing with tenants who were trying to unload the time remaining on their leases for pennies on the dollar. “The amount of sublease space proportionately is as great as its been in my memory since ’81,” said William R. Boyd Jr., senior vice president at Grubb & Ellis. “The most dramatic behavior of the market in 2002 was lowering the landlord’s expectations from what they could achieve as to effective rents.” Rents declined in all areas, even those where vacancy rates remained relatively stable, Boyd said, because of the competition for few deals that did venture into the market. Even in the investment sector, which continued to thrive in large part due to the weakness of the stock market and record-low mortgage rates, making a deal was difficult. “There’s probably $6 of capital chasing every dollar of product,” said Kevin Shannon, senior vice president for Grubb & Ellis’s investment division. “So in that environment you’re going to have fiercer bidding competition and buyers will lower yield expectations to get deals.” Forget finding a cheap deal in 2002. Anyone in the market to buy a property had to be prepared to pay top dollar and wait it out until the leasing market improves. Such conditions created a kind of have and have not environment in real estate. “You either have to have very deep pockets and patient capital, or you have to be very entrepreneurial and willing to risk it,” Kosmont said. Among the efforts highlighted in “Best Moves, Top Movers,” are a number of risk takers. Consider the Encino Courtyard project, a shopping center that has been struggling since it was built in 1989. Doerken Properties Inc., an entrepreneurial developer, revived the center, but not before breaking a few rules, not the least of which was turning over income-producing space to increase the parking capacity, and spending more than $5 million on the rehab. Another entrepreneurial developer, J.H. Snyder Co., managed to skirt the increasingly hostile office real estate environment by changing plans in mid-stream. Snyder officials had already applied for and received entitlements to build an office project in Agoura Hills, but the company put the brakes on the idea in favor of a residential development when the market went south. A larger developer would never have been able to make those adjustments because of their financing sources and the sheer weight of the larger organization. On the other end of the spectrum, only a large investor could have managed the purchase of Warner Center Plaza. The sale of the trophy property took nearly two years, and the kind of access to capital only a company like the buyer of the property, Douglas Emmett, would have. And that’s before factoring in the time it will take for the office leasing market to stabilize and the space to begin filling up again. Many buyers last year found they needed deep pockets just to bid on the properties that came up for sale. With sellers in such a strong bargaining position, and many deals closing in record time because of competition, a number of buyers found they were footing the bill for due diligence research even before the bargaining began. “People are being asked to look at roof reports and HVAC reports on spec without knowing if you’re going to get picked,” Shannon said. “The ground rules are tougher.” The companies and the people highlighted in “Best Moves, Top Movers,” all worked a little harder in 2002 and they sometimes spent a lot more money. The Arden Realty Inc. executives who leased the Calabasas Tech Center were willing to revise their plans again and again in order to take advantage of the deals that came their way. H.Carl Muhlstein, the Cushman & Wakefield leasing agent for The Pinnacle, kept in constant touch with those brokers most likely to represent the kind of tenant that would have an interest in the space. A few years ago, a broker with a property like The Pinnacle would blanket the market with brochures and sit back and wait for takers. In order to appease the neighbors in Thousand Oaks, PCS Development Group LLC spent a bundle creating an underground parking garage for their residential complex.
