Arden flourishes in fertile Southern California market

If bigger really is better, then Arden Realty inc. is one of the best public office landlords in Southern California.

An ambitious acquisition plan has catapulted the Beverly Hills company,formed only eight years ago, to the No. 1 public owner of office space inSouthern California. When the company went public in 1996, it owned 4 millionsq. ft. of office space and had a market capitalization of $540 million.

Today, it owns more than 16.4 million sq. ft., and its market cap is approaching $2.5 million.

"No one could have ever seen that kind of growth," says CEO and ChairmanRichard S. Ziman, who co-founded Arden Realty in 1990 with Victor J. Coleman,Arden's president.

As it grows at a phenomenal pace, Arden is adhering to the strategy that got it to the top of Southern California's public landlord list.

"We're still buying at below replacement costs in markets we want to be," Ziman says.

Arden's most recent acquisition was huge, even in this day of REITs acquiring other REITs in billion-dollar transactions.

In March, Arden acquired the Newport Beach, Calif.-based Layton-Belling & Associates (LBA) portfolio in a $614.5 million transaction that included 50properties totaling 5.2 million sq. ft.. With the new properties, Arden saidit will "further benefit from the competitive advantages associated with theeconomies of scale and submarket strength."

The company's growth plans don't end with the LBA acquisition; Ardenanticipates acquiring $500 million to $600 million worth of properties thisyear. "There are still good values," Coleman says. "You've just got to find them."

Discovering good values in the Southern California office arena has been akey strategy for Ziman and Coleman. They started Arden Realty in 1990 afterworking together at Pacific Financial Group, which was founded in 1979.Pacific Financial, which still exists as a shell corporation, began to marketits assets in 1989 and sold them at the end of 1991 as the real estaterecession of the late1980s/early 1990s took hold. During an 18 month period,the company sold $1 billion worth of product, Ziman says.

Shortly after starting Arden, Ziman discovered that California led the nation in small business formations, a statistic that to him signaled the bottom of the recession and a good time to find bargains on office buildings. In March 1993, the new company closed on its first office deal, buying the building adjacent to Century City.

When Arden started buying office buildings, real estate watchers doubted itsstrategy, Coleman says. "Nobody was buying office properties," he recalls."People were saying, 'You're crazy to be buying office properties.'"

The naysayers changed their minds about Arden during the next five years asthe commercial real estate industry in Southern California rebounded andexploded. The number of major buyers of office and other commercialproperties went from zero to a dozen, Coleman says. Arden's foresight paidoff as the REIT found several good acquisitions at good prices. "The idea waskey," Coleman says. "There's an opportunity to buy in our own backyard and totake advantage of the real estate market," he says.

The success of Arden has prompted some real estate watchers to credit Zimanwith possessing the special skill of knowing exactly when to buy and when tosell. He exhibited similar acumen at Pacific Financial. "They think I'm avisionary; I'm not so sure that I am," he says, adding that his plan wassimple: Buy at the bottom of the market.

Arden found the LBA portfolio, Coleman says, partly because of a relationshiphe had with LBA. Arden pursued the transaction as soon as LBA began to marketthe portfolio. "We knew it was a good opportunity the day we met these guys,"he says.

Arden's acquisition solidified the REIT's presence in its core areas of LosAngeles and Ventura counties and established for Arden a major presence inthe key submarkets of San Diego and Orange counties. "The LBA acquisition wasone of the great opportunities we saw in Southern California," Ziman says.

With the LBA portfolio, Arden now owns about 5 % of the Southern California office market, which comprises more than 300 million sq. ft.. Arden can now begin benefiting from its size, Ziman says. The company has taken over management of its new properties and will be able to keep operating costs down due to the economies of scale, he says.

The LBA acquisition also will provide the opportunity for Arden to increaserental rates in its new properties. Many of the existing leases were signedduring the real estate recession of the early 1990s, when rental rates werelow, Coleman says. As the leases begin to expire this year, next year and in2000, tenants should expect their rental rates to jump. "There's going to bedefinite sticker shock," Coleman says.

Another opportunity to increase income will come from charging for parking atproperties where it had been free, Ziman says. "Obviously we have a duty toour shareholders [to increase our funds from operation]," he says. "We lookinto all avenues and sources of revenue. We're just reverting back in manycases to what we had done in the early '80s."

Included in Arden's LBA acquisition were 15 research anddevelopment/industrial facilities containing about 1.5 million sq. ft. ofspace. The R&D/industrial properties are located mainly in areas where Ardenalready owns office properties, and they will afford the REIT new growthopportunities in a complementary property sector, the company says. Still,Coleman says, Arden will continue to concentrate on office holdings. "Will wego into apartments and retail and hotels? No."

Arden also probably won't be going into other states anytime soon either."[Southern California] will continue to be our focus," Ziman says. Although Arden had looked at possibilities in Denver, Phoenix and Las Vegas, Nev., "to date, we just haven't found the right opportunities," he says. Coleman agrees. "They [analysts] like our concentration," he says. "We are truly Southern California."

As busy as it's been, Arden could not help but catch the eye of California'sreal estate watchers. Stephen Kingsley, president of Kingsley & Associatesmarketing research and management consultant, says Arden has the chance tofocus on creating a particular image. Quality of service, operational excellence and brand name recognition are three items Arden should stresswhen executing its growth strategy, Kingsley says. "Arden has an opportunity and isbecoming a major player in Southern California," he says. "As a REIT, they are committing themselves down the road to focus" on one major geographical area.

Looking ahead, Arden is considering development options. "We are looking on a very targeted basis where rental rates justify new development," Ziman says, conceding that land now is very expensive.

Looking back, Ziman says he is pleased with Arden's performance. The company's stock, which came out at $20 a share now hovers around $29.

Ziman's also glad that his mom approves of his switch from law to real estate. "If my mother's happy, I'm tickled pink," he says, laughing.

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