King of Down-Market Offices Bets on Rentals: Real Estate
Los Angeles’s largest private office landlord, a former doctor with a portfolio of buildings that have seen better days, is turning his focus to apartments as the city’s demand for rentals surges.
David Lee, the founder and president of Jamison Services Inc., has $3.5 billion of mostly 20-to-30-year-old properties with minimalist lobbies, mid-tier retail on the bottom floors and often little or no landscaping. He is converting five of his about 60 Los Angeles office buildings, many located in the Koreatown neighborhood, to multifamily and is seeking more opportunities, including ground-up development, to capitalize on rising demand from apartment renters.
“I follow money,” said Lee, 58, who focused on internal medicine at Northwestern University and was a general practitioner until 2004. “We need more apartments. If you create creative residential space, you can get double the rent as compared to office.”
Jamison’s 13.3 million square feet (1.2 million square meters) of offices make it the largest closely held office owner in the Los Angeles area, according to Jones Lang LaSalle Inc. (JLL) and CoStar Group Inc. (CSGP) Shrinking demand for corporate space has sent vacancies at Lee’s properties up to an average of 25 percent, more than triple what they were four years ago. Apartment demand, meanwhile, is climbing as parts of the city including downtown, Hollywood and now Koreatown undergo a renaissance, said Bennett Kim, managing principal at Big Rock Partners LLC.
“Conversions do make sense for him,” said Kim, whose Beverly Hills, California-based real estate investment firm has owned Koreatown properties. Gross monthly rents for offices in the area are the “lowest in all of L.A.” at $1.50 a square foot -- half what multifamily buildings in the neighborhood draw, he said. “Seeing that opportunity, it makes sense to shift.”
Across Los Angeles County, office vacancies averaged 16.8 percent in the first quarter, up from 5.8 percent during the market’s most recent peak, in the first three months of 2008, according to brokerage CBRE Group Inc. Gross monthly rents fell to $2.58 a square foot from $2.84 over the same period.
Apartment vacancies in the county, meanwhile, dropped to 3.2 percent in the first quarter from their most recent high of 5.5 percent in early 2010, according to New York-based research firm Reis Inc. Gross monthly rents for one-bedroom apartments in Santa Monica, an area Lee hopes Koreatown will eventually resemble in its mix of trendy multifamily complexes, young residents and hip restaurants and stores, climbed to $3.23 a square foot in the first quarter from $3.06 three years earlier.
“After the recession, many people have been relocating into downtown and other areas of the city,” said Don Hankey, chairman of Hankey Group, a partner with Lee on an office-to-apartment conversion in Koreatown. “They don’t want to or can’t own a home, but instead they don’t mind smaller living spaces that are close to entertainment and culture.”
Jamison Services’ headquarters in Koreatown reflects the type of real estate the 30-employee firm owns, as well as Lee’s style of property management. The 12-story building at 3424 Wilshire Blvd., with its grayish-brown facade, has a RadioShack and a Big 5 Sporting Goods discounter on the ground floor, and a small, unadorned lobby with low ceilings.
Lee’s uncluttered corner office on the top floor, overlooking many of his company’s buildings, is decorated with a handful of golf plaques on otherwise empty walls. Lee, in an interview from a seating area in the room, said he plays the game once or twice a month.
“Lee has a reputation for never doing much to or at his office buildings, and he rarely ever increases rents,” said Curtis Palmer, head of CBRE Capital Markets’ multifamily group, based in Beverly Hills. “So he never delivers much in terms of yield increases. But there is good yield to be had in multifamily.”
At California Market Center in downtown Los Angeles, the rent on Michael Gay’s office has risen little in the eight years Lee has owned the property. In that time, indications that the wholesale center for fashion is being actively managed have all but vanished, Gay said.
“Since Lee’s company took over the building, they cut back on staff and the upkeep of the building,” said Gay, 63, owner of the Rep Et Trois showroom. “We always move around large rolling racks, so there’s a lot of chipped paint on corners. Areas where there are garbage chutes are stained black. No one from management is going around to take care of this. It all looks quite dilapidated.”
Jamison’s management style is to provide little maintenance or extra amenities, Lee said.
Lee, who has a master’s degree in business administration from the University of California, Los Angeles, has more than 100 commercial properties through Jamison Services, including two Las Vegas golf courses. There is about $2 billion in debt on the $3.5 billion portfolio, and Lee holds about 30 percent of the equity on the properties, he said. The rest belongs to high-net-worth individuals including family and friends.
In December 2011, the Federal Deposit Insurance Corp. ordered Lee’s removal as a director of Premier Business Bank, and he had to pay a civil penalty of $75,000, according to regulatory filing. The alleged violation related to a loan secured by one of Lee’s office buildings made by Premier Bank to an entity owned by his mother-in-law and her daughters, including Lee’s wife, Miki M. Nam. Lee, who denied the allegations, agreed to step down.
He wouldn’t comment on the issue.
Lee has six siblings and four grown children with Nam, a dentist by training. He immigrated with his parents from Seoul in 1971, and started buying office properties in Los Angeles at the end of 1994, two years after the Rodney King riots ravaged the neighborhood and months after the Northridge earthquake shook the region. Debt-to-equity ratios averaged 75 percent at the time, compared with 65 percent to 70 percent today, he said.
“If he can hold on to all his buildings, he is sitting on a goldmine,” said Carl Muhlstein, a managing director at brokerage Jones Lang LaSalle. “There is an insatiable residential demand, especially on mid-Wilshire, where most of his properties are.”
The drop in occupancies and the U.S. economic slump have probably hurt the values of Lee’s properties, Muhlstein said.
“Nobody could come out pristine buying over 100 buildings in a 15-year time frame using debt,” he said.
Among Lee’s holdings where demand has slumped is Wilshire Boulevard’s Paramount Plaza. The property was built in 1969 and backs a loan with an original balance of $96 million, according to a March 7 regulatory filing. Occupancy at the building, appraised at $141.4 million as of October, dropped to 72 percent as of January from 90 percent in 2007, according to the mortgage prospectus.
When Lee made his first purchases in the early 1990s, real estate “wasn’t that analytical,” he said. “We didn’t have all the information systems we have today. But I knew prices had dropped dramatically, and since I have a Korean background, I just thought I could get Koreans into my buildings.”
Today, Jamison Services is seeking rezoning approval to turn another Wilshire Boulevard office building into an 84-unit apartment property, according to Palmer of CBRE. Lee, who tends not to use brokers for his transactions, declined to give details of buildings slated for redevelopment because the plans haven’t been disclosed yet to current tenants.
Lee is close to completing the reconstruction of a 10-story office building at 3075 Wilshire Blvd. into 123 apartments, in a partnership with Hankey Group, a Los Angeles-based investment firm. The property, which had a 40 percent vacancy rate when it was a mid-tier office building, will have loft-like units with high ceilings, a fitness center and sauna, lobbies where residents can “hang out with friends,” and a business center, Lee said.
Don Hankey, who also is seeking entitlements to construct an apartment building in the area, estimates the value of the redeveloped property at $38 million, given an expected gross rent of $2.50 a square foot. That’s more than triple the $12 million it was worth as a vacant office building, he said.
The area Lee focuses on “is already one of most densely populated areas of L.A., and it has public transportation,” said Muhlstein of LaSalle. “A residential bonanza could be imminent there,” as happened downtown, he said.
Of the 30,602 residential units in downtown Los Angeles, more than 60 percent were developed since an adaptive-reuse ordinance was put in place in June 1999, according to Cushman & Wakefield and the Downtown Center Business Improvement District. Office-to-residential conversions include the San Fernando Building in 2000, and the Historic Gas Company Lofts in 2004, with a total of 51 buildings reworked since 1999, according to Cushman data.
One possible obstacle to success for Lee’s conversion plans is that many young tenants today prefer newly built apartment properties, such as a $190 million project that developer Jerry Snyder is erecting in the Koreatown area.
Snyder is constructing two towers with 464 units and ground-floor retail on the busy corner of Wilshire Boulevard and Vermont Avenue. The project will feature a pool, spa, meeting rooms and above-street parking. Units start on the eighth floor and will all have views of the cityscape, said Snyder, founder of Los Angeles-based J.H. Snyder Co.
“The residential market is on fire, but particularly here it is very strong,” he said. “The type of people that are here want new, they want modern, they want big gyms, they want meeting rooms.”
Lee, for his part, is focusing on repurposing buildings he believes will draw residential tenants -- particularly those young renters who appreciate the “edgy feel” of a redeveloped building, he said. More apartment properties also will help draw additional nightlife and restaurants to the area, Lee said.
“I saw the demand for downtown lofts, where people literally had to step over the homeless to get to their apartments, but they still were coming into the area,” he said. “Now you have all this entertainment and restaurants down there. That’s when I said let’s do conversions here too.”
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