Miller Starr Regalia

APRIL 28, 2010 

Transactional Attorneys See Market Improvement

By Kari Hamanaka 

Daily Journal Staff Writer 

Distressed deals, sale-leasebacks and few blockbuster deals to speak of: Welcome to the new normal, at least for now. 

Commercial real estate may be showing some signs of a turnaround, but even those who see the glass half full are yielding to caution on calling a recovery in California's real estate investment market, which saw transaction volumes decline roughly 90 percent from the 2007 market peak of nearly $90 billion. 

"We're going to have activity in 2010 - much greater activity than in 2009," said Tony Natsis, a partner and the real estate department chair at Allen Matkins Leck Gamble Mallory & Natsis. "It won't be an avalanche by the way. We're not going to get back to 2006 or 2007 levels, but it will be much healthier than 2009." 

According to statistics from New York-based research firm Real Capital Analytics Inc., California investment deals valued at $5 million or more totaled $2.7 billion in the first quarter of 2010. That's down 32.1 percent from the previous quarter, but statewide transactions were up considerably from the year-ago period by 60.5 percent. 

"Last quarter was particularly strong in light of the fact that the first quarter of the year, even in good times, tends to not be that strong," said Tony Ratner, a partner in the San Francisco office of Farella Braun + Martel. "That really didn't happen. You didn't see a crazy year-end." 

California Performing 

California compares favorably with the trends seen throughout the U.S., where transactions in the first quarter of 2010 decreased 19 percent compared with fourth-quarter 2009 but increased 47.2 percent compared with the same period a year ago. 

In California, transactional volume was down from the fourth quarter for all the major investment property types statewide, but they were still higher than the year-ago period. 

Office deals led the way with some $843.5 million of deals pouring mainly into the Los Angeles, Orange County and San Diego markets. However, the state's top office deal was CIM Group LP's $112 million purchase of Charles Schwab Plaza in San Francisco from C&C Investments, according to data from Real Capital Analytics, CoStar Group Inc. and Marcus & Millichap Real Estate Investment Services. 

Meanwhile, the state's industrial product trade fell behind with the lowest deal total among the major real estate investment property types, which also include the office, retail and multifamily sectors, with only $547.3 million of property trading hands in the first quarter. Most transactions closed in the Inland Empire and Los Angeles markets, which are home to more than one billion square feet of industrial space and typically dominate the state's industrial marketplace due to their proximity to the ports of Long Beach and Los Angeles, the largest ports of entry for U.S. imports. 

The industrial product segment's top deal was Realty Associates Advisors LLC's $25 million purchase of a Moreno Valley property at 16850 Heacock St. from CB Richard Ellis Investors. 

"You look for signs and I think I see some signs that things are improving," said Steven Lurie, a partner in the Los Angeles office of Greenberg Glusker Fields Claman & Machtinger. 

Real estate attorneys and brokers closest to the deals say the numbers tell only part of the market's story. Instead, they say that to understand the transition taking place in the investment marketplace requires a closer look at individual deals and what they mean to their respective markets. 

In January, Equity Office Properties acquired a building in Silicon Valley for $30 million from Brocade Communications Systems Inc. The deal was a sale-leaseback whereby Brocade leased back the property from Equity. 

While the price of the building was relatively modest, the deal represents the first investment move Equity Office Properties has made in nearly two years, Natsis said. 

In another deal, Natsis represented Los Angeles-based real estate investment trust Kilroy Realty Corp. in the acquisition of Mission City Corporate Center in San Diego from Maguire Properties Inc., another REIT headquartered in downtown Los Angeles. The sale price for the four-building complex, which will close in two transactions, was more than $50 million. 

"That's a publicly traded REIT growing its portfolio and growing its property. It's a very healthy sign," Natsis said. 

The relative lack of available financing compared with the boom years of the state's real estate investment marketplace, continues to drive the market. 

"Things have definitely changed since the market was at its peak," Lurie said. "Financing is very hard to come by." 

Still, Lurie closed a $48 million loan for an office property at the end of February. 

"The terms were stringent, but the fact that there was that money available for that type of loan was encouraging," he said. "It was a loan on an existing office property that had no debt on it." 

In the past few weeks, Hans Lapping, a shareholder in the Walnut Creek office of Miller Starr Regalia, said he has seen more interest from Southern California homebuilders looking to invest in both finished and undeveloped lots. Most of the interest is in the Inland Empire, but he said some builders are beginning to look at Northern California land. 

"There's certainly a lot of interest in these lots for a few reasons," Lapping said. "I think it's a little bit of optimism. I think it's that prices have hit rock bottom, and I think it's inventory where some of the public homebuilders need to start filling up their pipeline." 

Staying Busy in a Down Market 

Transactional attorneys have had to get creative to weather the downturn. 

Ratner has stayed busy by being flexible and having a willingness to be open to deals he may not have handled during busier times. He pointed to work on high-end, multimillion-dollar residential transactions as an example. 

At the same time, the shift in business also reflects the distress among landlords, tenants, buyers and sellers. 

"Instead of doing a lot of leases, we're doing a lot of subleases," Lapping said. "We're doing a lot of lease workouts and the same with the lenders. We're now doing a lot of loan workouts as opposed to originating new loans." 

Lapping added that the art of renegotiation reaches new levels in down cycles. 

"On the renegotiating of deals, it used to be deals were on a pretty fast track and you passed due diligence and then closed," Lapping said. "It's not uncommon that we might renegotiate one, two or three more times." 

Buyers are seeking the security of stabilized, high-quality real estate assets in the best locations, but the relative shortage of these properties on the market forces dealmakers to move faster on purchase agreements. 

"The lawyers are playing an incredibly important role in investment sales because of the speed at which they're moving," Natsis said. "They're moving at record speed. You've got to bid, win the bid, do your due diligence and sign purchase contracts in record time. None of these deals get to take months to do because if you win the bid and spend too long trying to sign the purchase contract, then they'll go to the second person." 

The anticipate wave of distressed properties that would deliver quality properties at discount prices has failed to appear, even as some noteworthy properties have traded at considerable price reductions. 

Lincoln Property Co. and Angelo, Gordon & Co. acquired the Orange County office property Griffin Towers from Maguire Properties for more than $90 million. With $200 million of debt attached to it, the lender directed the sale and got back 45 cents on the dollar. 

"Those are the kinds of deals we've been waiting to see. There's going to be more of those," Natsis said. "A lot of these lenders, especially the [commercial mortgage-backed securities] lenders are not going to foreclose. They're going to do short sales. Griffin Towers is a perfect example of that." 

Even if transactional velocity increases in 2010, which many real estate professionals expect, there continues to be the overriding concern about commercial real estate's other shoe dropping - the more than $1 trillion in mortgage debt backed by commercial properties that will mature over the next few years. 

"I'm cautiously optimistic," Lapping said. "I'm still very nervous about the fallout from securitized debt in the commercial arena still coming due this year and in 2011 and 2012."