The real deal: G.E.'s purchase of Arden Realty sends ripples through market.

THE impending sale of Arden Realty Inc. for $4.8 billion is expected to set into motion one of the largest redistributions of L.A.-area office buildings in history.

As part of its purchase of the Los Angeles-based real estate investment trust, General Electric Co.'s real estate unit will sell 13 Arden buildings totaling 4.1 million square feet to Chicago-based Trizec Properties Inc. for $1.63 billion. The deal will double the amount of Trizec's Southern California holdings, and make the region the company's largest market.

"If this isn't the biggest (office) deal in L.A. history, it's definitely in the top three," said Carl Muhlstein, a senior director at Cushman & Wakefield Inc.

All told, GE acquired Arden's 18.5 million-square-foot portfolio--the largest collection of Southern California office properties held by a publicly traded company--for $3.2 billion and the assumption of $1.6 billion in debt.

GE beat out Morgan Stanley Real Estate, as reported last month by the Business Journal. Maguire Properties Inc. had aligned itself with GE, but its part of the deal collapsed because Maguire's board first wanted to close all unrelated joint venture involving an Australian real estate company. GE didn't want to wait.

Maguire Properties spokeswoman Peggy Moretti said Rob Maguire, the company's chief executive and chairman, was on vacation last week and unavailable to comment.

Trizec got back into the deal at the eleventh hour--with executives in Chicago working past 4 a.m. to iron out final details before GE's announcement. Trizec spokeswoman Paige Steers said the company declined to discuss the negotiations behind the deal.

'A brilliant move'

It's little surprise that both Maguire and Trizec wanted the Arden properties. While Arden didn't have a large number of trophy assets, the massive size of the portfolio and its concentration in desirable Westside markets more than compensates for that weakness.

When the deal closes, GE will become one of the largest owners of office buildings in Beverly Hills, a market that consistently has some of the highest occupancy rates and rents in L.A. County.

Trizec, meanwhile, is buying a portfolio that includes the Howard Hughes Center near Fox Hills, the World Savings Center in Brentwood and 1100 Glendon Ave. in Westwood Village.

"It's a brilliant move," Muhlstein said. "Trizec and GE are buying a portfolio that took Arden a decade of hand-to-hand combat to acquire."

Richard Ziman, Arden Realty's chairman and chief executive, spent much of his career building the company's portfolio from scratch, but he's always been willing to sell for the fight price.

Ziman began acquiring Westside office buildings in the early 1980s, when vacancies were high and prices low. Within a decade he assembled a 5 million-square-foot portfolio of office buildings.

Then in 1989, when Ziman felt the office market had peaked, he sold the entire portfolio, mostly to Japanese firms and banks. The recession of the early 1990s--combined with a nearly 100 percent increase in new towers--pushed office building prices to historic lows.

Armed with the money from selling at the top of the market, Ziman and Victor Coleman, the company's president and chief operating officer, cobbled together a larger portfolio of mostly Westside properties. Eventually, the partners took the company public--using the proceeds to expand the company's holdings even farther.

By last year, Arden's Southern California portfolio--including assets in Orange and San Diego counties--had grown to nearly 19 million square feet. While it's the largest collection of such properties, the portfolio represents only 6 percent of the 325 million total square feet of office buildings in the market.

Ziman's early success earned him a reputation for being an astute market timer, leading many to wonder whether he is correctly anticipating another market top-off. "You can have the greatest location but if there's no timing, you've got nothing," Ziman said in an interview earlier this year. "You have to be patient to get to the next timing."

Raising rents?

Ziman and Coleman aren't exiting altogether. They have agreed to manage the portfolio for GE Real Estate, which could begin to slowly sell off a number of properties. "GE may start spinning off an asset here or there, but it's not going to flood the market or anything," Muhlstein said. "GE may look to do another portfolio deal similar to what it did with Trizec."

While GE is keeping mostly stable, well-occupied office buildings, Trizec is taking on properties with some significant upside potential.

With the close of the Arden sale--expected sometime in the second quarter--the buildings Trizec is buying will have a 9 percent vacancy rate, below the 12 percent county average.

Leases comprising nearly 40 percent of the space in the buildings will expire over the next several years. That means Trizec will likely be able to raise rents for a sizeable number of the 350 tenants in the buildings it's buying.

The Howard Hughes Center, with its entitlements for 490,000 square feet of new office buildings and 600 residential units, could represent one of the biggest opportunities for Trizec.

Late last year, Arden's deal to build Herbalife Ltd. a new headquarters at the Howard Hughes Center fell through because of escalating construction costs. But with rents in the surrounding Westside communities rising and the amount of contiguous space shrinking, the high cost of building a new office building could begin to pencil out.

"These high-quality assets, with strong embedded growth opportunities, will be a great addition to our existing portfolio," Tim Callahan, Trizec's president and chief executive, said in a statement after announcing the Arden deal.