Hot SoCal Market Warms Up Region's REITs

The Southern California office and industrial markets have been on a tear this year, and real estate investment trusts focused on the region have seen their share prices surge.

Arden Realty (ARI), a major office owner in Los Angeles and Orange County, is seen as a likely buyout target due to its portfolio. In coming months, Douglas Emmett -- a well-respected Los Angeles office and apartment owner -- is expected to file for an initial public offering.

What's got everyone abuzz about Southern California is that the area's office and industrial markets have been solid performers in a generally lackluster national environment. Job growth in the area has been strong, leading to low vacancy rates and growing rents across the region.

In turn, investors who placed bets on REITs focused on the area have been rewarded this year.

Kilroy Realty (KRC), one of the largest owners of office and industrial properties from San Diego to Los Angeles, is up 44% year to date. Arden Realty is up more than 20%, mostly due to the buyout rumors. Maguire Properties (MPG), which mainly owns trophy Los Angeles office buildings, is up about 14%.

"Basically the Southern California office and industrial markets are light years ahead of the national market right now," says David AuBuchon, an A.G. Edwards & Sons analyst.

Office vacancies across the region range from 9% to 12%, lower than the 14.5% national average for metropolitan areas. In the third quarter, Orange County had the nation's second-best office vacancy rate, at 8.9%, followed by a rate of 9.2% in the neighboring San Bernardino-Riverside Counties, according to Reis, a research firm. Only Washington, D.C., with a vacancy rate of 8.3%, performed better.

Kilroy, Arden and Maguire are the only pure Southern California office real estate plays, because nearly all of their buildings are in the region. Other major office and industrial REITs have exposure there, but not enough to really get investors excited on the stocks.