Hot SoCal Market Warms Up Region's REITs

That is why an expected REIT IPO by Santa Monica-based Douglas Emmett next year will likely see a lot of interest. Douglas Emmett owns one of the largest portfolios of Class A office and apartment buildings in Los Angeles, focused on the Westside and San Fernando Valley areas. The company, which also recently expanded to Hawaii, is expected to file within the next few months for an IPO of about $500 million to $1 billion, according to Barry Vinocur, editor of Realty Stock Review. Another market source confirmed the expected filing. Douglas Emmett's receptionist said the company doesn't respond to press inquiries.

The recent Casden Real Estate Economics Forecasts from the University of Southern California's Lusk Center for Real Estate say the Southern California office and industrial markets are poised to continue their solid growth in 2006.

"Stable job growth has helped reduce office vacancy rates and raise rents throughout the region," said Delores Conway, director of the Casden Forecast, at a real estate meeting in Los Angeles held earlier this month. "Southern California office and industrial markets will continue to hold their value through 2006 thanks to a flood of capital from mutual funds, REITs and pension funds needing to diversify real estate holding and lock in long-term revenue streams."

With Southern California's operating fundamentals so solid, a flood of capital has been chasing properties in the region. Cap rates, or yields on acquisitions, of quality office properties are now down to between 5% and 6%.

Because of these low yields, Arden -- which owns 18.5 million square feet of office space in Los Angeles, Orange County, and San Diego -- is considered a great portfolio buy. AuBuchon, the A.G. Edwards analyst, says a deal to take the company private is likely to be finalized soon -- with suitors having been narrowed to GE Asset Management, Morgan Stanley Real Estate Fund and Starwood Capital. AuBuchon expects the deal could fetch $50 a share, which would represent a premium of about 11% from where Arden's shares are currently trading. After hovering around $38 in September, Arden's shares have since run up more than 18% as the merger talk heated up.