Invitations were sent out to the biggest players, but no one came to the party.
The party was an auction, and JMB Realty was the host. The Chicago-based investment firm was looking for new debt last summer on its under-construction tower at 1950 Avenue of the Stars in Century City, and the guest list should have been filled with eager lenders.
The building seemed like a dream for any partner, and five years ago it would have been, brokers say. Two star tenants, Creative Artists Agency and private equity firm Clearlake Capital, have already pre-leased most of the 37-story tower. It is also new product, and Century City rents have hit all-time highs.
But in 2023, many institutional lenders and investors put the entire office asset class in a black box, not to be touched — even offices with star potential.
Not one firm wanted to make a loan on JMB’s tower, according to two sources familiar with the matter.
“It’s kind of the red-headed stepchild product type right now,” CBRE broker Todd Tydlaska said of office. “The most draconian investors are just underwriting the net present value of the in-place leases and assigning very little value to the residual.”
Deal flow hasn’t stopped completely, but because only a handful of investors and lenders are willing to invest in office buildings in Los Angeles — or elsewhere across the country — they get to be extremely picky.
This group is only putting money into offices up for sale at a low enough basis that they can’t resist, or when there is an opportunity to half-commit — put some cash into a building without being on the hook as an owner. Others look for properties that have a clear path to income at this very point in time.
“We’re in a cycle where people are looking at today,” said Jeff Worthe, president of Worthe Real Estate Group, which owns more than 5 million square feet of office and studio real estate across L.A. This has a downside. “Long-term, I don’t think it’s the right approach,” he said.
Forever holds
As for who is buying: Family offices and high-net-worth individuals are the only ones considering office buildings in L.A. right now, according to brokers and office buyers, mostly because they operate on long timelines.
The big guns — on the level of Blackstone, pension firms and public REITs — are cutting and running.
These firms operate on shorter hold periods, and their funds have to generate returns for their investors within a certain amount of time. Assets weighing down potential returns go to the chopping block.
Last month, Kennedy Wilson, a publicly traded REIT, sold an office complex in Glendale for $60 million — a roughly 60 percent haircut on what the firm paid for the building in 2017.
The 441,000-square-foot complex at 400 and 450 North Brand Boulevard is 92 percent leased right now, but one of the largest tenants is not planning to renew once its lease is up in April.
“It’s anything but office.”
Kennedy Wilson bought the complex in 2016 through a $440 million real estate fund raised from public and corporate pension funds and Fortune 500 companies, it said at the time.
Seven years later, these types of institutional investors have redlined office properties, according to brokers and investors. In the case of Kennedy Wilson, it’s possible that investors in the fund decided to cut their losses and move on.
“It’s ‘anything but office,’” one broker said, adding that employees at institutional investors are concerned they could lose their jobs if they advocate for an office investment.
If the building goes south, “their bosses would say, ‘I told you so’,” the broker added.
That leaves space for a player like Worthe, who says he will hold properties forever. He is now taking advantage of an institutional partner getting out of the office market.
At 15000 Aviation Boulevard, a 207,000-square-foot office building in Hawthorne leased to the Federal Aviation Administration, Worthe is working out a solution with its lender, LoanCore Capital, to avoid a default or delinquency.
To move the negotiations along, Worthe’s firm is buying out an institutional partner that no longer wants to be involved, Worthe said. The lender will keep its loan at $70 million but is negotiating a new interest rate.
Worthe is not surprised that LoanCore is following his lead and sticking around.
“We’re at a stage now where the operator is pretty important,” he said. “If you think that we will get you an above-market outcome, then you’re really excited for us to stay in.”
“We don’t want to leave,” Worthe confirmed.
The perfect place
When investors are looking at buying an office property, according to Andrew Kirsh, a real estate attorney at Sklar Kirsh in L.A., they first consider geography — is there demand from tenants to move into that market?
The answer in L.A. is not so simple, which is part of the reason investors are so picky about office there. Upscale neighborhoods, like Century City, Burbank and Hollywood, cater to their own tenant pools and have higher office rents than the county’s average. But most areas do not have an anchor industry, making it hard for investors to draw conclusions about the future of any given building.
By contrast, San Francisco’s downtown has a “more obvious tenant pool,” said Alain R’bibo, a real estate attorney at Allen Matkins — technology firms.
“Institutional investors are concerned they could lose their jobs if they advocate for an office investment.”
Downtown L.A., traditionally home to law firms, is losing some to Century City, the high-rise hub of the Westside. In December, Sidley Austin signed a deal to move its headquarters out of Downtown L.A. and into JMB’s 1950 Avenue of the Stars once the building opens in 2026.
“I don’t know that there’s a story there about who is going to come up and take all of this high-rise office space,” R’bibo said of Los Angeles. “It’s a much more challenging environment.”
Yet lenders and investors don’t get a price correction for dealing with this challenge. Instead, leasing commissions, rent abatement periods and tenant improvement costs have all increased, Kirsh said.
“You look at Downtown L.A., it’s an extremely tough office market, almost nonexistent,” said Kirsh.
The right play
While some investors are not comfortable owning office assets outright, some are half-committing — if the deal is structured correctly.
Lincoln Property Company, a commercial owner based in Dallas, is signing agreements to manage assets on behalf of lenders taking properties back, either through foreclosures or deeds-in-lieu.
“We can help preserve and, in some cases, increase the value of the asset,” said Rob Kane, an executive at Lincoln Property who’s based in Los Angeles. The firm is still hashing out agreements with lenders, and Kane would not disclose the properties for which his firm was taking over management.
He said Lincoln Property can help put in more equity to assist lenders and banks in exiting those assets “as the capital markets recover.” If interest rates go down, more borrowers will be inclined to tap debt, so lenders will be more active.
“We did a significant amount of that work back in the financial crisis,” Kane said. “In Southern California, we doubled in size through taking over assets like this, providing property management, and then ultimately wound up in an ownership position over time.”
Others are figuring out creative ways to swoop into a deal at a discount.
Kirsh said he’s currently working on two deals with identical structures in which the lender started a foreclosure process and immediately sold off its loan to a new buyer. The buyer, also the lender at this point, then recorded a deed-in-lieu, transferring the title on the property to itself.
The result: The seller loses all its equity, and the original lender takes a significant haircut on the loan.
But the buyer “is buying the asset because they’ve got conviction that at such a low basis, they feel they can make it work,” Kirsh said.
Neither buyer in Kirsh’s deals is a large institution, though the acquisitions are significant.
That surprised him.
“Institutions are the ones who bought these properties in the pre-Covid era, and non-institutions are coming in and buying these properties today,” he said.
Cash is king
For many, the unavailability of debt is the largest barrier to an investment in office — or any asset class. Those untethered to the capital markets are undeterred.
The buyer for Kennedy Wilson’s 400 and 450 North Brand in Glendale was a limited liability company called Joe Li, which paid the $60 million in cash. One source familiar with the deal said the buyer came from a family office, though a virtually unknown one.
In November, the Muller Company and real estate private equity firm BentallGreenOak sold a 13-story office building in Torrance for $25.2 million, or about $120 a square foot, records show.
They had bought the 210,300-square-foot property, dubbed Del Amo Crossing, for $62.4 million in 2015, or almost $300 a square foot, and had planned a $35 million renovation.
The new owner, Alta Loma Enterprises, a professional services company based in the San Bernardino County city of Rancho Cucamonga, did not record a loan in connection with the purchase, paying in cash, according to records and a source familiar with the matter.
Cash deals might beckon institutional investors back.
Goldman Sachs and EQT Exeter are some of the firms raising cash for opportunistic buys. Others, like BentallGreenOak, are stockpiling money for these opportunistic funds even as they are selling properties.
The question remains whether they can raise enough to cover the full purchase price — and if they feel comfortable enough with conditions to do it. If an office ticks all the boxes, these opportunistic investors could scoop up exactly the right buildings without committing to monthly debt payments. More cash could then be spent on sweetening tenant deals and dolling up properties.
“Office is so out of favor, so [buyers] should be greedy when others are fearful,” Tydlaska of CBRE said, quoting Warren Buffett. “The fact that there is no debt means you’re buying at this super-low basis.”
“Mark my words,” he added, “more money will be made in office this cycle than anything else.”