CIM Group’s planned sale of Two California Plaza, a 52-story, 1.37m-square-foot office building in Downtown Los Angeles, is reportedly moving more slowly than expected. The investment company is said to have quietly halted sales efforts but may still be entertaining offers after broker CBRE garnered bids that fell short of expectations. Calls to CIM and CBRE were not returned by press time.
The property at 350 South Grande was expected to sell for as much as $550m, or about $400 per square foot. The adjacent One California Plaza, a roughly one million-square-foot office building that was up for sale at the same time, was sold in March to a Rising Realty Partners and Colony Northstar for about $460m, or $460 per square foot, according to published reports.
Two California Plaza has an occupancy level of just 60%, according to data from Real Capital Analytics, and this contributed to the softer than expected pricing, local players told REFI. “If someone’s going to have to do heavy lifting, they’re probably going to pay [less than $550m]. The building needs to be stabilized,” the local player noted.
City National Bank signed a lease for up to 300,000 square feet in late 2016, according to published reports, and the sale could have been a move to test the waters on pricing. “It’s not unusual to test the waters and bring it out, especially when there’s more value to harvest,” the local player said.
CIM acquired the property in early 2014 for $301m, or $236 per square foot, from CW Capital after previous owner Maguire Properties defaulted on a commercial mortgage-backed securities loan. There’s a roughly $423m Citigroup mortgage on the building.
The deal highlights a broader problem with pricing in Los Angeles, where high-quality assets have seen sales halted when pricing targets haven’t been achieved. “Most sellers in the last year are not happy with the pricing that they got, and equity is being very reserved and cautious,” one veteran Los Angeles player added. “If the seller doesn’t set appropriate price expectations, it’s not going to trade. Apart from markets like Beverly Hills and West L.A., Los Angeles’ office market is not frothy at all.”
Santa Monica has seen a number of high-quality buildings recently sold for record prices, said Bryan Sanchez, cio of Lionstone Investments, who is not involved in the Two California Plaza deal. “These prices may be justified by the high demand demonstrated from a wide variety of tenants in highly productive industries. Lionstone views L.A. as the entertainment content capital of the world, with a talent pool that has strong preferences for certain locations and building types,” he added. “For many years, this has lead the creative class to Santa Monica, Culver City, and Hollywood. More recently, there has been a move to downtown Los Angeles, which is different today than it was in the 1980s, 1990s, and 2000s.”
Cap rates are near historic lows while rents on the Westside, Wilshire, Downtown Los Angeles, and Long Beach neighborhoods are at or near all-time highs, said Ryan Rauch, cio of Common Areas, who is also not involved in the Two California deal. “Part of what is driving these valuations is that there is a general acceptance that interest rates will not stay this low forever and the abundant access to capital could dry up on short notice,” he added. “Many in the market are moving as fast as they can to get while the going is good which is driving up prices.”