Tide Is Turning in Long Beach

Commercial property owners in oft-troubled Long Beach are growing optimistic that their office buildings will finally fill, as new city attractions and a recovering economy draw formerly elusive corporate tenants downtown. But the wait was too long for some building owners, who recently took advantage of rising prices and sold out.

They were part of a small group of ambitious developers who targeted the city for construction of dazzling office towers in the 1980s. One of their key calculations was that Long Beach’s geographic advantages would be a magnet for professionals.

Given that Long Beach lies between Los Angeles County’s biggest employment centers to the north and Orange County’s booming commercial districts to the south, Fortune 500-types would want offices around the halfway point, builders reasoned. Ocean views from top quality quarters would be impossible to resist.

Unlike in the movie “Field of Dreams,” however, they built it, but no one came--much to the chagrin of prominent local real estate entrepreneurs John Cushman and Michael J. Choppin, along with Japanese construction giants Taisei Corp. and Kajima Corp.

Because of a variety of economic, sociopolitical and even geographic circumstances, the addition of three “world-class” office buildings to Long Beach’s skyline instead resulted in a disastrous glut of office space that has lasted the better part of a decade. The end of the Cold War didn’t give the city much of a peace dividend: Long Beach’s key naval base closed and its military- and aerospace-reliant economy lost about 50,000 jobs.

But now Long Beach’s economy is recovering, and a bevy of new leisure attractions and public improvements--such as the popular new Aquarium of the Pacific--seems to bode well for the downtown office market’s future.

And as has been the case elsewhere around the country as real estate markets began to recover from the recession, well-heeled investors are now picking up the pieces in downtown Long Beach. The most visible is Toronto giant TrizecHahn Corp., which closed its $63.8-million acquisition of the luxurious 21-story Shoreline Square building in September.

TrizecHahn Gets 2 Good Deals

The Shoreline deal came about a month after TrizecHahn plopped down $86 million for the nearby 24-story Landmark Square, which like Shoreline ranks among downtown Long Beach’s three finest office properties. The World Trade Center, developed in 1988 by Choppin’s IDM Properties Corp. and Kajima, is considered the third. IDM filed for Chapter 11 bankruptcy protection in 1992.

With downtown Long Beach landlords still plagued by low occupancy levels and rental rates, TrizecHahn was able to purchase the premium properties for well below their estimated “replacement costs,” according to Trizec Hahn Senior Vice President Michael Escalante.

The publicly traded company--which has been buying business district high-rises at depressed prices while selling off its huge portfolio of regional malls--bought Landmark Square from a group including Los Angeles-based Cushman Realty Corp. co-founder John Cushman for about 75% of what it would cost to build it today. And the $63.8 million TrizecHahn paid Taisei for Shoreline Square factors to about 65% of its estimated replacement cost.

“We’re quite happy to be increasing our presence in downtown Long Beach and the Greater Los Angeles marketplace,” Escalante said. “We think we’ll have lots of synergy associated with this investment,” he continued, adding that TrizecHahn has already signed leases for an additional 16,000 square feet at Landmark Square since the company bought the property, and is working on still more tenant deals.

TrizecHahn bought “world-class assets in a semi-undiscovered market,” said Bob Alperin, a principal at Long Beach brokerage Matlow-Kennedy Commercial Real Estate and a 20-year veteran of that market’s ups and downs. The same buildings would probably be worth 75% to 100% more in the high-rent West Los Angeles or Newport Beach marketplaces, he said.

“Trizec with its global view is able to see that the gaps [between value and rent] are going to shrink over the next few years--albeit not overnight,” Matlow-Kennedy principal Kimball Wasick said.

The favorable prices paid for the buildings will help the financial performance of TrizecHahn’s big investment in the relatively small downtown Long Beach market, which at about 4.3 million square feet seems dwarfed by downtown L.A.’s 32 million. But the investment is still a risk, particularly considering that financial problems abroad could slow the near-term growth of the U.S. economy and hence limit demand for office space throughout Southern California.

But downtown Long Beach’s office market seems to have achieved momentum. Amid all the new city attractions--such as the aquarium, the adjacent entertainment-oriented Queensway Bay shopping center, the expanded convention center and talk of a face lift for downtown’s long-troubled shopping mall--office vacancies are falling and rents are rising.

“It’s really nice to see what’s going on downtown today” after all the lean years earlier in the decade, Alperin said.

While the current vacancy rate of about 18% is still much higher than what’s generally considered equilibrium between supply and demand, the rate has fallen by one-fourth from 1997’s 24%. Corporate mergers and restructurings have added vacant space, but as Alperin and Wasick stressed, tenants are filling the vacancies at a better clip than the market has seen for years.

Alperin and Wasick noted that tenants in the health-care and technology fields have been the most active as a good chunk of downtown’s vacant office space has been absorbed so far this year.

And, predictably, rents are “inching up” after finally stabilizing once the economy started pulling out of the recession, Wasick said. The best offices in the city rented for about $1.55 to $1.65 per square foot monthly two years ago; the rate is now $1.85 to $2. And the strength in that Class A market is now spilling over to the Class B sector as well, as space in second-tier buildings has typically risen from the $1.25-to-$1.35 range two years ago up to $1.40 to $1.60, Alperin noted.

By contrast, rents at the Westside’s best buildings average about $2.50 or more per foot. Downtown Long Beach rents are actually more comparable to the Los Angeles area’s single-biggest office market, downtown Los Angeles--which also saw a huge development wave just before the recession sunk in. Overall, rents in downtown Long Beach now average about $1.45 per square foot monthly, according to brokerage Grubb & Ellis.

An Influx of Visitors and Buyers

Jeff Baize, the western regional managing director at the real estate investment banking firm Hamptons International (formerly Richard Ellis), which handled the Shoreline Square sale for Taisei, said asking rents for Shoreline’s vacant offices--around 13% of the building--are “consistent with” the rates for top buildings.

He added that continued rental appreciation of 5% to 7% annually in downtown Long Beach “is a very realistic probability for the next couple of years, especially in the Class A properties.” Shoreline’s tenants include TRW, Nextel, Comerica, PaineWebber and Ford Motor Credit.

Alperin and Wasick are also optimistic, pointing out that a great benefit of the aquarium is that people who wouldn’t otherwise come to downtown Long Beach are doing so--and are noticing other attractions for commercial businesses. As Alperin put it, “There’s a whole level of intelligentsia--business owners and professionals--who are probably seeing downtown Long Beach for the first time in quite a while.”

Alperin and his longtime partner Wasick also noted that other real estate entrepreneurs have been successful buying, renovating and marketing downtown office towers. An affiliate of investor Kambiz Babaoff’s Rokmar Capital has brought occupancy at the 18-story Sumitomo Bank tower from 40% when it bought the property two years ago up to nearly 90% today. Another Rokmar affiliate bought the 13-story 110 Pine building early last year when it was about 60% occupied; it’s now also approaching the 90% mark.

Babaoff is also planning to start construction early next year on a 21-story all-suite Marriott Hotel at Pine Avenue and Ocean Boulevard.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Real Estate Trends

Downtown Long Beach Office Net Absorption (in millions of square feet):

Eight-quarter average: 0.05 million square feet

*

Downtown Long Beach Office Vacancy Rates

1998 -- Without sublet: 17.3%

3rd-quarter 1998 with sublet: 18.8%

*

Note: Net absorption reflects the gain in rented space. Vacancy rate is the total vacant square footage divided by total rentable square footage in all existing buildings. Sublet space is s1885430629 Source: CoStar