Cities in the Los Angeles region that hope to become regional economic centers – and alternative locations to established centers like downtown Los Angeles – will have to meet high standards to attract institutional investment in office buildings, manufacturing centers, industrial and warehouse facilities, shopping centers and other commercial properties.
That was the view of a panel of real estate experts in discussing the future of the region’s downtowns at a recent conference at the USC Lusk Center for Real Estate. The panelists were Stanley Iezman, President and CEO of American Realty Advisors; Robert Osbrink, Executive Vice President and Regional Managing Director, Grubb & Ellis; Christian Redfearn, Assistant Professor, USC Marshall School of Business; and Raphael Bostic, Ph.D., Director of the Casden Real Estate Economics Forecast, who presented a Southern California Office and Industrial Market Forecast at the conference.
According to the panelists, pension funds and other institutional investors are interested in investment-grade properties in cities and areas that meet stringent demographic, infrastructure, property and other standards.
A city must:
· Have a critical mass of people, workers and housing to attract the business investment that drives demand for office space, retail centers and other real estate and increases property values.
· Make the investment in transportation systems, public safety, schools, recreational facilities and other public infrastructure to attract people and businesses. Pasadena, Irvine, and Anaheim are among the cities that have made the necessary infrastructure investments, sometimes through public/private partnerships with the private sector.
· Have a pool of investment-grade office buildings and other assets with relatively high occupancies, quality tenants, stable cash flows, and the right locations.
By these measures, only certain markets in the Los Angeles region would interest institutional investors – the Inland Empire, for example, may not yet have the demographic base to attract significant institutional investment in office properties. But as the Los Angeles region continues to grow, more markets in the Inland Empire or places like Valencia will begin to draw institutional investment.
Investors including individuals, partnerships, or opportunity funds will continue to invest in properties that may be higher on the risk scale than investment-grade assets but offer commensurately higher yields. These include properties that support the business operations of the region’s large and growing number of entrepreneurs.
Even when they do find investment-grade properties that meet their criteria, institutional investors face tough competition in trying to acquire these assets, the panelists noted. Investors are trying to shift more capital from stocks and bonds into commercial real estate, which offers stable assets, predictable cash flows, and comparatively high yields. But while demand for investment-grade properties is strong, some owners have kept their assets off the market in the expectation that asset values will increase. Other owners have been unable to reach agreement with prospective buyers on price. This will not discourage institutional investors from continuing to pursue investment opportunities in the Los Angeles region, one of the most attractive investment markets in the U.S. As the panelists noted, the region has a diverse economy, faster economic growth than other regions and the U.S. as a whole, strong population growth, and a deep base of intellectual capital. It will continue to be a magnet for institutional investment.
To order a copy of the Casden Real Estate Economics Forecast, call the USC Lusk Center at (213) 740-5000. Look out for the 2003/04 Casden Forecast, scheduled to be released in December.