Los Angeles is cementing its place as a center for global commercial real estate investment.
In 2017 it overtook New York City in the world rankings, becoming the second most active investment market, with US$22.9 billion in transactions during the year. London was first while NYC dropped to third, with transaction volumes almost halving to US$20.9 billion.
But, Los Angeles’ climb towards the top of the investment league table is no one-off.
Sunny investment climate
LA has emerged as leader of the pack of city ‘Contenders’ that have been closing the gap on the ‘Big Seven’ (London, New York, Paris, Singapore, Tokyo, Hong Kong and Seoul), established world cities that have, traditionally, been the most successful in attracting global real estate investment.
These contenders are all starting to acquire many – or most – of the attributes of the top cities: gateway connectivity to their national and continental economies, effective metropolitan scale and market size, the trust of global capital, a diverse talent pool and multiple clustered specializations.
LA’s relative affordability and availability of product in comparison to other global gateway markets is key to its appeal for investors, especially foreign ones, says Pranav Sethuraman, Global Capital Markets Research with JLL. “Strength and diversity of the local economy” also plays a part, he adds.
City of attractions
Connectivity to the rest of the United States has been a crucial part of Los Angeles’ success in attracting investment in recent years. Increasingly the region’s port and airport have become main entry points for the Pacific Rim countries, with international passenger traffic rising 8.7 percent in 2017.
Size and economic strength are also critical factors. “With 10 million people living in LA, representing a quarter of California’s population, the market has metropolitan scale and market size to support healthy investment activity,” notes David Doupe, Americas Capital Markets with JLL. “Meanwhile, the LA economy is highly diversified, but also one of the largest in the U.S. in terms of output.”
So while Los Angeles was originally slower to recover from the recession than Northern California, its subsequent growth has been built on a broader industry base. “That provides a more sustainable economy, with no real single industry sector risk,” says Tom Bohlinger from JLL’s LA Capital Markets team.
In addition, Los Angeles has successfully groomed clusters of specialization, most notably in the tech, media and new media sectors, said Bohlinger noting major new commitments to the city from industry giants.
Investors are going to town
All of which is acting as a powerful lure for investors. “The industry mix affords more protection against volatile economic swings, providing more stable investment opportunities,” explains Doupe. “Transit and infrastructure developments are also supporting sustainable growth, which is another attractive quality for investors.”
Sovereign wealth funds – which typically access the market through joint venture partnerships with local operators to leverage their local market knowledge – have been especially active in targeting large core and core plus investments. Meanwhile, value-add equity and debt fund strategies represented over half the funds raised in 2017.
Investor activity has been broad-based, reflecting the city’s economic diversity. The industrial sector, which has been a powerhouse across the country, made up 30 percent of flows in 2017, with retail accounting for 17 percent and hotels six percent.
“The rise of ecommerce is driving demand for distributors throughout LA and the Inland Empire, and investment activity is following suit,” notes Doupe.
While office investment was strong in 2017, seeing 47 percent of the total flows, “there was a lack of office opportunities for the amount of capital hunting for properties,” he adds.
Prospects for 2018
And this will be a growing problem more broadly for potential investors in LA, with a lack of value add and diminishing core opportunities, says Bohlinger who says “the real challenge is going to be finding product.”
“As we’ve continued to see in the first quarter, there is an abundance of capital, but only a modest level of new offerings.”
Despite the supply constraints, and some record-setting prices (for example, the Westside’s record high price in some cases has exceeded US$1,200 per-square-foot), LA transaction volumes are likely to continue to grow at a moderate pace during the coming year – barring any sudden unexpected increase in interest rates.
“The potential for inflationary pressure caused by rising wages and record low unemployment pose a potential threat to economic growth,” notes Doupe. “Overall though, investors will continue to see LA as an attractive opportunity.”