Younan Exits L.A. for Brighter Markets

"We had 30 buildings in Los Angeles. We have sold them all," Younan tells GlobeSt.com. "We feel that the valuations are well ahead of the fundamentals in Los Angeles, and we feel uncomfortable owning assets as these prices, so that's the reason we are selling."

The property that Younan has sold for $50.5 million is the 173,727-sf Sepulveda Center at 3415 Sepulveda Blvd., which Newport Beach-based KBS Realty acquired in a transaction that Tom Bohlinger of CB Richard Ellis' Los Angeles Institutional Office Investment Team brokered on behalf of both parties. Younan's one remaining office property in Southern California is the 275,000-sf Pacific Pointe in Torrance, which it is under contract to sell within a month.

Once the Pacific Pointe deal closes, Younan says, his company will remain out of the Los Angeles office market. He cites the rising prices, falling cap rates and lower returns on investment among the company's reasons for getting out of L.A. and into the Dallas, Houston and Chicago markets, where it already owns substantial holdings.

"The cap rates have compressed to the point that they are below the cost of money, which gives you negative leverage going in," on L.A. office deals, Younan tells GlobeSt.com."Naturally, there are those who will tell you that there are fundamentals that will take the valuations up, but I disagree with that," he adds.

The Younan Properties CEO observes that Dallas, Houston and Chicago "have not participated in the party that has been going on for the past several years." But Younan believes that properties in those markets will appreciate considerably in the next three to seven years, possibly at rates comparable to the appreciation in Southern California in recent years.

In Chicago, Younan recently acquired 211 East Ontario, a 172,000-sf class A high-rise, bringing the company's Chicago portfolio to more than 500,000 sf. In Dallas, where the company is the second largest office landlord, it recently bought the 34-story, 828,000-sf KPMG Centre.

As for Los Angeles, Younan says, "We will wait until the fundamentals get back to reality before we invest in this market again." He says that too many people are chasing too few assets here, with prices fueled by huge infusions of 1031 exchange money and institutional investors seeking stabilized assets.

In addition, rents per sf have not risen in proportion to the increased cost-per-sf being paid for office buildings, Younan adds, so the result is a trend town lower earnings per sf in Southland buildings.

Founded in 2002, Younan owns a national portfolio of 22 class A office properties totaling more than six million sf. Younan says that his company, having built considerable equity from the sales of its L.A. assets, will continue to fund its acquisitions internally.