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March 15, 2019

A River Runs Through L.A.’s CRE Capital Scene

Los Angeles’s office and industrial investors balance big capital flows with the small details.

LOS ANGELES—Commercial real estate investment capital these days can be like a river flowing into prime gateway markets. Riding it is not enough; to make headway, one must know how to navigate the ebbs and flows, the eddies and rapids. Strong flow, such as the influx of capital into the Los Angeles metro, can push, pull and sometimes even twist values. GlobeSt.com spoke to office and industrial brokers from Kidder Mathews, the largest independent commercial real estate firm on the West Coast, to get their take on the L.A. investment story as the first quarter comes to an end.

“Class C industrial assets in coastal-influenced Los Angeles submarkets have become jewels,” said Kidder Mathews’ Richard Putnam, an Irvine-based SVP. “Institutional industrial investors are highly confident of land value, hence almost any class of improvement — metal buildings, fenced yard, low-clear manufacturing, trailer storage — has become an acceptable investment/land carry strategy.”

Putnam explains that venture and institutional capital investment are driving up land prices in the market. That’s good for industrial owners, but it is also forcing some tenants and industries eastward, especially those not sensitive to local delivery timing. Other L.A. sectors are on the wax and wane for different reasons.

“The historical ‘professional sector’ of tenants — legal, accounting, insurance and financial — in an office submarket like the Tri-Cities are able, through technology, to continue to be more efficient and productive in less office space than ever before,” said William R. Boyd, Jr., Kidder Mathews’ EVP in Pasadena. “It has had a dramatic effect as seen in the reduction of annual office absorption in those office markets that have catered to those tenants.”

Conversely, media, technology and coworking firms are driving the increased annual office space absorption in West Los Angeles and elsewhere. Kidder Mathews reported that $4.5 billion of venture capital entered those metro industry segments in the first nine months of 2018, after $7 billion was invested into 350 L.A. firms in 2017.

Los Angeles is known for its plot twists, and the CRE investment sector is no different. There is another side to the capital infusion story.

“The recent investment in some Los Angeles suburb office markets has been inflated by the competition to place capital, causing the winning bidder to pay a historically high price for the office building,” Boyd said. “That higher price leads to the asset quoting a higher rental rate to support that price. Unfortunately, there is no correlation that rents must increase in the market just because a new owner quotes higher rents. Some buildings with new owners elect not to lease at the market rents assuming that rents will soon increase.”

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