What is it going to cost to buy a piece of commercial property in 2006? Conventional wisdom says that rising interest rates will put a lid on real estate prices after several years of frenzied escalation. But more than a few in the industry believe that, at least in Southern California and the San Fernando Valley, real estate prices will continue to climb. Limited supply, rising rents and continued demand could exert upward pressure on prices even as interest rates escalate, they say. “Note that from 2000 to 2005 there’s been this unprecedented upward movement in real estate values happening at the same time that fundamentals were weak,” said Howard Stern, senior vice president and chief investment officer at Arden Realty Inc. “There are factors that will continue to support real estate values. One is capital flow, two is a favorable real estate environment and finally, high construction costs, so replacement costs and leasing going forward will propel price appreciation.” As recently as two years ago, a real estate buyer’s unofficial yardstick was a cap rate around 7 percent on average for most properties, regardless of the sector. But cap rates, a measure of returns on real estate investments in the first year of ownership, have been falling since then. Rental rates were not keeping pace with rising property prices, so with rental income flat and acquisition prices rising, the income yield dropped lower and lower. Today, although there are variations for older properties and the rare bargain property that’s been neglected, buyers would be happy to find a property selling at a 6 percent cap rate and many are settling in the 5 percent range. “We don’t see cap rates coming down substantially, nor do we see them spiking quickly,” said Larry Scott, senior vice president for AvalonBay Communities Inc., a real estate investment trust that builds and holds multifamily properties. “We think that today’s cap rates, although they are historically low, reflect a paradigm shift in investment activity. Investors are okay with cap rates in the 4 percent to 6 percent range where they would have been more comfortable with a 7 percent range historically.” The decline in cap rates has largely been driven by demand, which in turn was propelled by record low interest rates. Simply put, as the cost to carry properties declined, they became more affordable, even as prices rose. Having fallen to a mid-three percent range, the 10 year treasury yield, on which mortgage rates are based, is now in the mid-4 percent range. Experts project that it is likely to climb to the 5 percent range before the end of the year. But even that increase may not put a crimp in demand. “As long as that movement is happening in an orderly fashion and is occurring along with improvements in occupancies and rents, it is not going to create a major disruption in the investment market,” said Hessam Nadji, managing director of research services at Marcus & Millichap, which recently published an investor outlook projecting continued demand for investment properties. Rental rates for all property types in the Valley are expected to escalate in the coming year, and with improved fundamentals, experts say, prices will remain elevated. Investors, they reason, will continue to view real estate as a stable investment opportunity so long as rents are rising and vacancy rates are low. The outlook is the same for all property sectors. Asking rents for office space in the San Fernando Valley remained relatively stable at about $2.15 per foot for most of 2005. But in that time, vacancy levels have declined to the mid-single digit range in a lot of markets. With virtually no new office product coming into the market, real estate professionals predict that rental rates will rise by 20 percent or more before the end of 2006. Already, newer buildings in Burbank and Westlake Village are commanding rental rates at or near the $3 range. Rents have remained stable in the industrial sector for a number of years now. But experts predict that too will change as the supply of industrial space tightens further. Continued industrial development in the Santa Clarita Valley was helping to keep a cap on rental rates, but those rates have been escalating as well, limiting the options for industrial tenants. The situation is the same in the retail sector and the multifamily sector, where tightening supplies of space have already pushed rent increases in the 5 percent range in 2005. “What’s happening is leases are expiring and the leases are rolling into higher rental rates,” said Eric Hasserjian, first vice president at Arden Realty. “Depending on the submarket, rental rates are increasing anywhere from 10 percent to 25 percent.” Nationally, prognosticators say that the outlook is less clear in the multifamily market, but those involved with multifamily investments in Southern California are not expecting a downturn anytime soon. Here too, supply is extremely limited, and a continued influx of population virtually assures that rental rates will continue to increase. “The unknown is job growth and how strong job growth is going to be,” said Scott at AvalonBay. “But even a half of a percent of job growth in Los Angeles is a huge number of jobs. Short of job growth falling off completely, we like the prognostications for apartment fundamentals in the next two years in L.A.” With such exuberant predictions for rental and occupancy rates in the local area, many say that prices for properties will continue to rise, even with higher interest rates. “The cap rates were driven low because of declining interest rates,” said Thomas P. Bohlinger, senior vice president at CB Richard Ellis. “On the other hand, rents are increasing so rapidly that if you have a building that has significantly under market rents, but the leases are going to turn in the next three to five years, you may find people willing to pay a 5ish cap rate.”

Protecting the zoning of an industrial area in Chatsworth was the immediate goal of a recent roundtable of Valley economic and business leaders called by Los Angeles City Councilman Greig Smith. Smith is looking at what changes can be made for the master plan, the guiding policy statement of how the industrial area will be used. “In the plan we can add specific language that this is a unique property we won’t allow to be downsized to another use,” Smith said. Smith called the first of what is expected to be a series of roundtables of business, economic and real estate experts on Feb. 9 in the face of layoffs resulting from the announcement of the closure of the Los Angeles Times Chatsworth printing facility and a Washington Mutual Inc. call center, and reduction in space and workforce by DeVry University, all I his council district. At the roundtable, the participants came to the conclusion that the layoffs were not part of a trend, Smith said. “We wanted to make sure we had the pulse of what’s going on over there,” Smith said. “These large companies don’t join the chambers, there is no association and no one person to talk to over there.” Dan Blake, director of the San Fernando Valley Economic Research Center at California State University Northridge, said the meeting was a step toward good planning for the Valley. It was better to identify potential uses for the property as it comes on the market rather than responding to any implications after the land gets directed to another use, Blake said, adding, “It brings more certainty to development.” The Chatsworth industrial area was described by Smith as one of the largest in Los Angeles and a premiere light industrial area. Some of the options proposed at the meeting of the type of industry that could go there included biotech, manufacturing and shipment of goods, Blake said. “This would be an opportunity for someone looking for floor space and looking for a lot of acreage,” Blake said. The rash of closures and layoffs began in December with the announcement by the L.A. Times that it would close its sprawling 26-acres printing facility as part of a consolidation of the company’s production facilities. The move will result in the loss of 110 jobs. That same month De Vry Inc. announced it would sell its 20-acre school campus in West Hills, which includes a 106,000-square-foot building. Washington Mutual Inc. is pulling a combined 1,600 employees from a call center and loan processing center in Chatsworth and moving those jobs to other cities. The next roundtable is scheduled for March 30 and Smith said that attendees will look to set definite goals of what the planned series of meetings should accomplish, Smith said. He eventually wants to include Los Angeles Mayor Antonio Villaraigosa and executives from large corporations in the area in a future meeting, Smith added. But the first meeting did identify that the Chatsworth property should maintain its industrial zoning as a way to keep jobs in the Valley. There already is a good balance between housing and industrial uses and to make the printing plant property into housing was determined by the participants to be “a tragic mistake,” Smith said. But Roberto Barragan, president of the Valley Economic Development Center, a Van Nuys-based nonprofit business-development group, said the bigger threat to the area’s future uses comes from retail, not residential. “We need limitations and disincentives to not allow that conversion to retail,” Barragan said. While retail jobs can be at the higher end of the minimum wage scale and provide for a living wage, they are not the jobs that are desirable in the Valley, Barragan said. “There’s no way you can compare a job at a Jamba Juice to a job at a Washington Mutual,” Barragan said. “That’s why the threat to the L.A. Times property is the potential to make it retail.” While land available for housing is shrinking there is still more of that available in the Valley than what can be used for industrial uses, Blake said. “You don’t want to chew up the industrial-zoned land and then have to deal with where you are going to put job-generating business,” Blake said.

Seeking to capitalize on its success of non-stop flights to the East Coast, low-fare air carrier JetBlue is adding another flight out of Bob Hope Airport in Burbank. The fifth daily flight to John F. Kennedy International Airport in New York City begins May 5. The airline added the new flight because of the success and demand of its existing non-stops to New York City, Bryan Baldwin, a spokesman for the airline said. The airline began daily service out of Burbank last May with three flights, and a fourth being added in July. “We get a unique [passenger] mix flying out of Burbank,” Baldwin said. “Because we are close to areas with companies in the entertainment industry we do get a lot of people flying on business.” In 2005, JetBlue served 227,000 passengers on its Burbank-to-New York City flights.

Recognizing the important role technology plays in establishing and promoting small businesses, SCORE Los Angeles is changing its emphasis in the type of volunteer counselors it wants for the San Fernando Valley. Once primarily retired business people who used their free time to give advice to people wanting to set up a small business or with existing business owners, the organization now wants to attract younger volunteers with expertise in technology. According to Al Portnoy, co-chair of the Los Angeles chapter, it is important for SCORE to attract volunteers who could bring a new set of skills. “An organization such as ours has the obligation to keep current and offer services to those operating in today’s business environment,” Portnoy said. SCORE is a national organization established in 1964 to assist small business owners and is a resource partner of the U.S. Small Business Administration. The organization has 65 counselors serving 30 offices throughout Los Angeles County. The main Glendale office has three counselors available daily, while at other locations, including the Valley, the counselors are available through appointments only. Counselors are required to give a half day once a week to meet with small business owners or those who have an idea for a business who want to talk about it with an experienced businessperson, Portnoy said. With many of their counselors in the age range of their late 60s to early 70s, attracting potential volunteers in their late 40s to early 50s is a change in emphasis from using retirees although counselors don’t necessarily need to be full-time business people, Portnoy said. “You don’t have to be retired you just have to be willing to give some time,” Portnoy said. “The more entrepreneurial they are the better they can work with budding entrepreneurs.” Rochelle Scott had already been running her Woodland Hills wig business Godiva’s Secret for six years when she hooked up with SCORE counselor Don Doner to determine the course she wanted to take her business. Creating a website for her business was one of the projects she and Doner worked on together, Scott said. Although the website does not necessarily translate into additional customers, it does help create credibility for her services, said Scott, who works primarily with cancer patients going through chemotherapy. “People can start to investigate on their own from their home,” Scott said. “The client can start to look at the wigs and read the testimonials before they come in.” Karen Gadson, owner of Joyful Gifts by Karen, designed her own website more as a visual brochure than as a way to transact business for her gift basket company. Gadson is now redesigning the website after receiving a critique by an Orange County SCORE counselor. “He was great,” Gadson said of the advice she received from the counselor. “He told me to add animation characters and redesign it in a way to catch the eye more.” Having counselors with knowledge of the Internet and how it can be used for sales, distribution, advertising and promotion is important as those skills are especially helpful in setting up home-based businesses, Portnoy said. “It’s a low-cost entry (to starting a business) as opposed to signing a lease and finding a location,” Portnoy said. But a SCORE counselor such as Doner who has helped along 30 to 40 successful businesses in his 15 years also gives advice that can’t apply to a computer screen. In meeting with a prospective business owner, Doner said he has them write out a vision statement of what they want to do and where they want to be in three to five years. He uses examples not only from his own life when he owned service stations and car dealerships but from other successful businesspeople, such as Ray Kroc who at age 53 started the McDonald’s Corp. to franchise fast-food restaurants. “I tell them they are never too old and they need to be healthy in mind and spirit,” Doner said. “I target the passion in their belly and if I hit that passion, I know I have a customer for life.”

The California Medical Association has selected UMB Healthcare Services to provide health savings accounts to its member physicians. Marsh Affinity Group Services will provide insurance as part of the arrangement. Dr. Jack Lewin, CEO of the CMA, said the accounts provide value and simplicity for physicians when using the health care system, and that they provide significant tax savings as well. Roy S. Lyons, a senior vice president for Marsh Affinity Group Solutions, said that most physicians will be able to use the accounts to lower their practice expenses, and that with online enrollment members will have easy access to the new benefit. The CMA is made up of 35,000 member physicians throughout California.

In today’s real estate market, just finding a suitable property poses a challenge. Add to that spiraling prices, a seemingly endless spate of construction materials cost increases and a mountain of bureaucratic red tape tied to the development process. Developers and investors need competitive spirit and resourcefulness in equal measure to survive the challenging environment. We asked a handful of developers and investors active in the San Fernando Valley’s real estate scene what they think of the current market, how they see the future and how they cope. Here’s what they said. Jeff Johnston President The Johnston Group Calabasas Q: What are you currently developing? We currently have seven buildings on the Malibu Canyon Business Park and Corporate Center at Malibu Canyon campus. We’re developing the eighth and final building in the second complex. We’ve been doing a lot of redevelopment lately. We purchased the Canwood Business Park last year in Agoura Hills and we’re currently redeveloping that property. Q: Why have you focused on redevelopment lately? We’ve looked more toward that direction simply because land prices have gotten so out of hand. It’s very difficult between construction costs and land costs to build something that makes any sense right now. So we’ve focused on trying to redevelop existing properties. Q: Have you sold any of your properties recently? Our last sale was the Westlake Promenade office park within the last two years. That was more of an internal decision with our partner. The way the partnership was structured, it was a good time to sell for both partners. Q: How difficult has it been to resist the temptation to sell in this market? We’ve sold a few properties over the years but for the most part we like to hold property just because we love the area. To try to trade into something else doesn’t make sense. You’re now buying something else at a higher price that you don’t know and we’d just as soon stick with the property we do know since we intend to be in the real estate business for the foreseeable future. But I would say, yes, it’s difficult not to sell. Q: What’s your best-kept negotiating secret? I think the key to negotiation is trying to be reasonable on most issues, and when you need your issue, you stick to it. And most people will give it to you if you’ve been reasonable. The key is you’ve got to know the points you have to have and figure those out ahead of time and structure your negotiation that way. Q: How do you manage the stress of the real estate business? That’s an easy one: golf. Just getting out on the links with a little fresh air and a little competition among friends relieves stress. Q: What’s your favorite local course? Probably the Riviera Country Club. Cary Lefton CEO Agoura Realty and Management Sherman Oaks Q: What have you bought recently? Last year most of our focus was on Hawaii. We recently closed on a six-acre parcel of land in Cudahy. It was an old industrial manufacturing site that we’re going to redevelop into a 90,000 square foot retail center. Q: Most of your development roots are in the Valley. Why are your current projects elsewhere? We haven’t had much luck in the Valley based on limited opportunities for large parcels of land, and those that have been available have been priced very high. We’ve had to compete with commercial developers for a lot of the property that’s been on the market, and the residential developers are able to pay higher prices, so we’re not able to be as competitive. Q: Where do you see your future efforts focused? We’re still looking for opportunities in the San Fernando Valley. There’s such a limited amount of inventory that’s out there. But at the same time, we still have to make deals as developers, so we’re looking at other communities as well. Q: What’s your best secret negotiating strategy? Our best negotiating secret is our tenure in the business. Our company has been established for 20 years. We certainly have that to our advantage when competing against companies that have not been around as long as we have. Q: How do you manage the stress of being in the real estate business Lots of exercise. I run four to five miles every other day and I do some light weight lifting. Mark Ossola President M.W. Ossola & Associates Inc. Calabasas Q: What are you currently developing? We’re doing a $45-million shopping center, Village at Moorpark, and the $8-million Moorpark Corporate Center. Q: What attracted you to these projects? On the shopping center, it was a piece of property on a key intersection across from a major shopping center and we had the opportunity to attract tenants. When we closed (on the acquisition) we were 70 percent pre-leased, and the economics of the deal were extremely favorable. On the Corporate Center, it was the opportunity to buy 33 acres of land that were already entitled and ready to go. Q: Is your strategy to hold or sell? It depends on the partners I’m working with. Some of my partners are opportunity funds, so they like the higher yield and you end up selling the property. The other partner is a family trust that likes to hold onto the asset for cash flow. Q: How difficult has it been to refrain from selling property in the current market? We’ve been offered a 6 cap rate on the Village at Moorpark which we turned down. It makes it extremely difficult to walk away from potentially a $20 million profit. But in the long term, we’d rather hold on to it than take a $20 million profit that you’d potentially have to pay ordinary income taxes on. Q: Where will your next projects come from? I have an $80 million project under construction in Seattle. I have a $50 million project under construction in Utah. So that it means for us is we’re looking at projects in other parts of the U.S. and you’re on an airplane a couple days a week. Q: What’s your best-kept negotiating secret? I’d say it’s generating a personal relationship with the seller. If you look at most of my deals, I bought property multiple times from the same sellers. Q: How do you manage the stress of the real estate business? I play ice hockey. I play competitive ice hockey at the Los Angeles Kings training center in El Segundo twice a week. My team is Los Angeles Thunder. We’re in fourth place in our division out of 19, and we’re the oldest average age team in the league. We routinely play against 19 and 20 year olds. Larry Scott Senior Vice President AvalonBay Communities Inc. Newport Beach and Encino Q: What have you acquired recently in the Valley? We’ve acquired a land site, 3.3 acres in Canoga Park, and it has a 39,000-square-foot office building that will be redeveloped for 210 apartment homes. We closed on Avalon Encino, and we’ll develop 131 luxury apartment homes and 12,000 feet of street level retail. Construction should start in March or April. Q: The company’s strategy has been to hold onto its properties rather than sell them. Why? The reasons are twofold. One is being a REIT we’re required under IRS guidelines to hold properties for four years. That’s one underlying consideration. The other is that being a public company our main driver of stock price is funds from operations. So by increasing funds from operations year over year, the value of the company increases. So the more units we build from ground up and the longer we hold those that’s providing new funds from operations year over year. Wall Street analyzes us based on cash flow from our operating properties. The higher the FFO, the higher the stock price goes. Q: Why did the company just open an office in Encino? Geographically, it strategically puts us in a location that can service not only Los Angeles proper but also Ventura County. Our business plan focus is more heavily geared towards L.A. County and Ventura County as opposed to Orange County at the current time. Q: What is attracting you to the LA area? High barriers to entry, which limits the supply. We like the apartment fundamentals we see in L.A. and Ventura as well as Orange County and San Diego. The problem with Orange and San Diego is finding adequate sites. They tend to be newer areas. Where we find a lot of our opportunities is L.A. tends to be an older, more established municipality with older buildings a lot of which are coming to the end of their useful life. We’re looking at more of a focus on infill where we’re tearing down older uses. Ventura provides us an opportunity to differentiate the product we’re providing by doing more suburban apartment communities. Avalon Camarillo, with 249 apartment units, will be finished in July. Q: What’s your best-kept negotiating secret? I would say it’s being well prepared and having a strong knowledge of land use and product. We know what we’re going to put on a site when we first look at it and therefore we can negotiate with accuracy from the very beginning and that gets us a lot of deals. We may not be the first choice every time, but when something happens with the first choice we’re the trustworthy second choice backup. We’re not going to tell somebody we think their price is crazy. We say this is what we can pay you for the site. If you find the greater fool terrific, but at the end of the day if you want to sell it and don’t want to be re-trading, we’re the company to come to. When we put an offer forward we will commit to that offer and close the deal based on that offer. Q: How do you handle the stress of the real estate business? I like to surf. It’s very meditative. It’s a solo sport and it gives you a lot of time to reflect. I usually get out once a week. I collect American muscle cars, and I like to drive them on weekends. I go out very early in the morning. I currently have a 1965 Chevy Chevelle Super Sport convertible and I have a 1967 Camaro RS/SS convertible. Howard Stern Senior Vice President, Chief Investment Officer Arden Realty Inc. Los Angeles Q: What have you bought in the greater San Fernando Valley area recently? We bought a portion of the Teradyne campus in Agoura Hills from Lowe Enterprises. We also purchased the Homestore building in Westlake Village and Warner Corporate Center. Q: What attracted you to those properties? We are a big fan of the West Valley in general. We feel the demographics are very strong. The whole Conejo corridor is someplace we would love to have more presence. We have a good amount of product in that corridor we thought it would be enhanced by Homestore. We already owned the Woodland Hills Financial Center and we always wanted something in Warner Center. When we bought the Agoura property, we were hoping we would get that whole Teradyne site. We felt it would be a good foothold there. Q: What’s your outlook for the greater Valley real estate market in the coming year? We are looking at many other things in the West Valley. I think everyone believes 2006 will be another good year. The volume for the first couple of months has not been high; I’ve seen a lot of little deals. They have a little more hair on them, and they’re not easy deals. Unless you’re dealing with a trophy building, the deals aren’t easy. The due diligence is becoming more detailed, so as a seller, you can’t just say here’s my stuff. Q: What’s your best-kept negotiating secret? As you know it’s very hard these days to have a competitive advantage. Most people can offer the high price, they can offer a quick due diligence, they can offer cash and close fairly quickly. So what we have is our reputation and credibility. I think we’re at the top of our game with that. We do a lot of stuff up front when we’re giving our best and final so we take out the uncertainty that is associated with those deals. I think at the end of the day when all is equal, people like to do deals with people they enjoy doing business with. Q: What do you do to relieve the stress of the real estate business? I just stay very focused and I don’t let emotion cloud judgment and I communicate internally with all the departments here.

Universal City North Hollywood Chamber, Networking Breakfast 7:30 a.m.-9:00 a.m. Coco’s Family Restaurant, 6601 Lankershim Blvd., North Hollywood $15 prepaid, $17 at the door Contact (818) 508-5155

Waste Management will host a series of Sun Valley Community meetings. The company provides waste and environmental services throughout North America. The first meeting is on February 28th at John Francis Polytechnic High School at 7:00 p.m. The meetings will be conducted in English and Spanish, the English meeting will be on February 28th and the Spanish meeting will be on March 2nd. The goal is to create an open dialogue regarding community needs.

Shoe Pavilion Inc., a shoe retailer in Sherman Oaks had an increase in preliminary unaudited net earnings, reporting $1.3 million or $0.17 cents per share for the fourth quarter of 2005 due to improved sales. Net sales in the fourth quarter of 2005 were $29.5 million. For the same period for fiscal 2004, Shoe Pavilion had preliminary unaudited net earnings of $1 million, or $0.14 per share on net sales of $24.8 million. For the full year of 2005, Shoe Pavilion preliminary unaudited net earnings rose to $2.7 million or $0.36 per share on sales of $36 million versus earnings in fiscal 2004 of $2.1 million or $0.30 per share on sales of $29.9 million.

Encino Chamber, Education Committee 1:00 p.m. Buca di Beppo, 17500 Ventura Blvd. Encino Contact (818) 789-4711