A Los Angeles family investment firm thinks now is the time to buy office properties, looking to follow up on its two acquisitions in a week with more deals in greater L.A. even as some high-profile buildings face distress and foreclosure because of reduced demand.
Elat Properties acquired the roughly 215,000-square-foot 801 S Grand Ave. in downtown Los Angeles and the roughly 126,000-square-foot Taft Building at 1680 N. Vine St. in Hollywood for a combined $74 million last week, according to CoStar data.
The firm is bullish on the future of offices despite dropping sales, rising vacancy and employees still working from home, Elat Properties Vice President Aviel Golbari said. The firm plans to hold on to its newly acquired offices in downtown and Hollywood as long-term investments, keeping them in their current use.
The company's reason for optimism: supply and demand. Golbari said he expects little growth in the office supply of greater L.A. in the years ahead as properties get converted or demolished for other uses and construction slows. With less office space, he said, there will be more demand for properties that Elat Properties owns.
But the local office market faces stiff challenges. Vacancies are at a 25-year high in greater Los Angeles at 14.9%, according to CoStar data. The market's average rent is $42.22 per square foot, up 0.9% year over year. Office construction has fallen 25% year over year in greater L.A., according to CoStar data.
Meanwhile, multiple office high-rises in downtown Los Angeles face foreclosure amid rising vacancy and weakening demand in a market that's known for having older and less desirable office buildings. Some financing, too, has dried up in downtown L.A. as lenders fear the current office market's softness.
The United States is expected to have 1.1 billion square feet of vacant office space by 2030, compared with 688 million square feet in 2019, according to a Cushman & Wakefield report. Meanwhile, it predicts 330 million square feet of U.S. office space could become obsolete by the end of the decade if working from home persists.
Reduced Footprints
Golbari said he thinks the value of the office real estate Elat Properties acquired will grow impressively in the years to come.
"We think in five or seven years people will look back and be completely shocked with these purchases,"
Before then, Elat Properties' strategy is to make its spaces reflect current demand, Golbari said. That means office floors need to be converted into smaller spaces for tenants looking for reduced footprints, he said.
Office owners need to be more realistic about leasing up properties, Golbari said. Elat Properties' goal is to get its offices closer to 90% leased, not necessarily fully occupied. Right now, 801 S. Grand Ave. is 75% leased, and the Taft Building is 38% leased.
"Of course, we plan on slightly lowering the asking price to heat up demand and activity," Golbari said about asking office rents.
Elat Properties is no stranger to the L.A. market, where it owns more than 15 properties totaling roughly 667,000 square feet, according to CoStar data. The firm's newly acquired 12-story Taft Building has a rich history. Opened in 1923, was Hollywood's first high-rise office and once held the offices of actors Charlie Chaplin and Will Rogers.
Since buying the Hollywood and downtown L.A. offices, Elat Properties has been approached about other acquisition opportunities, Golbari said.
"We see a future in office," Golbari said. "There's a lot of fear. But when there's fear, there's opportunity."