Arden Realty's Richard Ziman Opines On Regional Industry Trends

Analysts have downgraded REITs recently because of concerns over the real estate market going forward. How is Arden, one of nation's largest REITs, impacted by the current market recession and business climate?

Arden Realty is a $3 billion public real estate company that elects to be taxed as a real estate investment trust (REIT). We own almost 20 million square-feet of office space in 225 or more office buildings located exclusively in Southern California. We are the largest office landlord in Southern California, public or private.

Several publicly-traded REITs recently have been downgraded and, frankly, I don't understand why. Yes, we are in a recession, but these public companies are very strong with hard assets. Arden, for example, has a 40-45% debt to total market capitalization with 55-60% true equity.

Some people are concerned that REITs won't have sufficient income to pay the dividends at the current level. However, if you look at their funds available for distribution and their dividend payout ratios, almost all public companies have the ability, even after reducing their projected earnings due to the impact of the recession, to maintain their current dividends.

We hope we've seen the bottom of this economic cycle, but nobody can accurately predict where we are exactly.

Arden evidently is in the market to buy properties, having just done so in San Diego and in Torrance. What was attractive about these properties and how did you assess value?

We look at our portfolio all the time. We look at where we would like to fill-in with select properties and where we'd like to sell-off properties. We look at which assets have matured, may no longer have a proper fit in the portfolio or are located in outlying areas. Our primary objective in acquiring properties is to buy quality assets in sub-markets where we currently have a presence. Economies of concentration and economies of size are very important to us.

In San Diego, we purchased properties that strategically fit our existing portfolio. In addition, we bought these properties at excellent capitalization rates, and the prices per-square-foot are below replacement cost.

In Torrance, the Gateway projects add two buildings in a sub-market in which we already are the dominant landlord. These are true suburban properties that are in great shape. They are well tenanted with a price per-square-foot substantially below replacement cost, and we'll get a good initial return from day one. So, those properties, like the ones we purchased in San Diego, fit nicely into our acquisition program.

Elaborate on the property profile of a potential acquisition. It appears that the suburban markets are Arden's focus, despite, for example, the renaissance in the urban core of Los Angeles and San Diego. Are you at all attracted to downtown markets?

We like the downtown San Diego market. We own the largest high-rise and the tallest building in downtown San Diego and have for many years. San Diego is a true 24-hour city. It has all the amenities of housing and entertainment, overlooking a beautiful bay. It has great infrastructure, great access- a perfect type of urban environment with good hotels, condominiums, and nightlife-everything you need for a downtown to function well.

We have never been a buyer in downtown Los Angeles. Even though we are the largest owner of office space in Southern California-and, downtown L.A. represents a 40 million square-foot sub-market and probably 12-13% of the entire inventory of Southern California-we have looked at downtown Los Angeles given the prices at which the buildings trade, and frankly, downtown L.A. as a 24-hour city has yet to happen. Simply stated, it's an inadequate return on the investment dollar.

We believe we could take those same dollars and get a lot more ‘bang for our buck' in the true suburban environment in Los Angeles. Yes, there's the new Staples Arena. Yes, there is the new Disney Concert Hall. Yes, there is the new Cathedral, but most people don't live there. They still commute from suburban residential areas. There are more housing projects being completed like the Medici, but that's 800, not 8,000, units.

If you look at the leasing world in downtown Los Angeles, I believe that in the last quarter or the quarter before, there was a net negative absorption of half a million square-feet. You haven't seen rental rate growth. The only thing growing there is the price of buildings on a per-square-foot basis, which means yields are going down.

The projections are that California, in the next decade or two, is going to increase significantly in population, perhaps growing from 34 to 50 million-another 6 million in the Southern California area. Of what significance are such growth projections for Arden's plans? What opportunities, if any, do you foresee for Arden Realty?

Population growth increases demand for office space. It may not be directly proportionate, but it will increase demand. At the same time, we've got huge barriers to entry in Southern California. We have no growth, reduced density, reduced height restrictions, set-back requirements, increased parking requirements, increased fees for the state, county and you name it. New construction is very expensive, and it's very difficult to build in this environment.

As the population grows, more office space will be needed, and as demand increases, rental rates should go up. I don't think there is any market in this country I'd rather be in than Southern California.

However, people will only continue to move here only if Los Angeles continues to provide a higher quality of life. Unless the state, county and local governments really mature and address the issues that dramatically affect our quality of life, people will begin to move elsewhere. There are only so many residents that can be handled in California. There is only so much the schools can do, the health care system can accomplish and the traffic system can handle.

Your comments reflect a keen awareness of the nexus of infrastructure investment and population growth. As someone who has been active in the civic and political life of local, state and national politics, does California presently have the political leadership and focus necessary to meet its developmental challenges?

In Los Angeles County, there are approximately 83 cities. It's so hard to get anything done when the city of Beverly Hills has its agenda, the city of Santa Monica has its agenda, the city of Culver City has its agenda and so on, and these are all neighbors touching each other. When people drive from Pasadena to West Los Angeles, they go through different cities. Everyone has got to begin to work together, and the State probably has to step in and take a leadership role in this regard.

We also have to understand that mixed-use projects are good because they promote less traffic, less noise, less energy consumption, and there's a positive impact on the quality of life. Yet, the number of mixed-use projects in the County of Los Angeles is almost nil.

Second, we probably do need some kind of czar at the State level to initiate a program or programs so that the cities and counties are mandated-with their master plans, their development plans and their planning process-to take into account the needs and agendas of their neighbors. In order for this to succeed, there is going to have to be a combination of a favorable political environment, real estate entrepreneurship and perhaps most importantly, academia and research coming out of the great institutions we have in California.

Let's turn to the Ziman Center for Real Estate at UCLA and your thoughts on what its role and agenda should be over time?

The Ziman Center for Real Estate, which I am very proud of having established last year, will become, in my opinion, the finest real estate center in the United States, if not the world.

The agenda is to bring together academicians, researchers, politicians and policymakers along with the real estate entrepreneur to resolve issues in Los Angeles, Silicon Valley, Salt Lake City, or wherever they may be. That's the focus of the Center.

We are going to create, not only a research environment-and it's already there to a certain degree-but an academic environment that takes root in the ranks of real estate professionals. Whether our students go to work for state, county or city government, for a planning company, for a real estate entrepreneur, or whether they go to another university to teach, they will begin disseminating the expertise and knowledge learned at the Ziman Center to initiate the solutions to some of these problems.

If you were drafting a couple paragraphs related to issues addressed in this interview for the governor's second inauguration speech in December, what would you write for Gov. Davis?

First and foremost is that healthcare, as health, is a human right. That is paramount. Second, we must have good education at every level, from preschool through graduate university level. We must have quality education. If we cannot educate our youth and provide satisfactory health care services, everything else we have discussed will fail. Those are the basic legs or underpinnings of California's society and its economy.

As we are going down that road, the governor has to access quality of life. That's housing, traffic, jobs and all those things that make life good. I'm convinced that if you have a solid school system and good healthcare facilities, jobs will come. I know that Gray Davis will take the mantle of leadership in his last four years as governor and tackle these issues that are so important for the future of the State of California.

Lastly, the largest real estate developer in California may be the school districts. A $13 billion state bond and a $3.3 billion LAUSD bond have just passed-and there will be another $12 billion on the state ballot in two years time. What advice could you offer our school districts on wisely investing these voter approved funds?

At the Los Angeles Unified School District we have, in Roy Romer, an outstanding superintendent. This man is a believer. This man has vision. Roy will do what's necessary to improve the system. He's just been handicapped without funds. There are 600,000 to 700,000 students in the Los Angeles school district without seats. There are aging, decrepit, inefficient facilities throughout the district.

With this bond issue of $3.3-$3.5 billion dollars for LAUSD, which I believe the State is obligated to match on a one-to-one basis, there's going to be a tremendous amount of funds available to rejuvenate and expand the physical plant and amenities of the LAUSD and that's going to make a significant difference.

Is it going to be spent properly? I have every confidence that Roy Romer and the people he attracts to him will be able to execute a brilliant business plan to spend this money wisely. By the way, these bond issues are not just benefiting the school districts. They are benefiting the business community of Southern California, mainly in Los Angeles County. There are architects, engineers, contractors, plumbers, electricians, you name it, who are going to be supplying services and goods for these new schools. That is great for the economy. As a result of these bonds, billions of dollars will be injected into the Los Angeles economy where it is sorely needed.