Institutional real estate managers with properties in California say talk of the state's unsuitability as a real estate investment is overstated.
They concede, however, that a series of earthquakes, brush fires, floods and riots - coupled with a sluggish economy - paints a not-very-pretty picture of the Golden State.
Bob Schau, real estate investment officer for the $5 billion Kansas Public Employees' Retirement System, Topeka, would agree. He described California as "a tale of two cities." Southern California has serious questions, he said, while San Francisco has good demographics and tight supply constraints. "Most of the ills are confined to Southern California."
Mr. Schau acknowledged that under normal circumstances, Southern California being out of favor would present an investment opportunity, but he doesn't think that will happen because of secular changes under way.
The Kansas fund has a $425 million property portfolio, of which $45 million is in California through commingled funds. Those California properties weren't damaged by the Jan. 17 earthquake, he said.
"The photos you see about a natural disaster makes you feel the whole world fell apart," said Bob Burke, chairman of AMB Realty Advisors, San Francisco.
Franklin Real Estate Management Inc., San Mateo, invests exclusively in California on behalf of institutional clients. Said Tony Burton, president: "I was born and raised here. Half of the earthquakes that have occurred, I've never even felt. Sure I got under the desk in 1989 (during the San Francisco earthquake). But I was no more at risk than walking across Madison Avenue (in New York) at 4 p.m. in the afternoon."
Real estate money managers say returns will not be adversely affected because most buildings owned on behalf of pension funds are newer structures with stricter construction guidelines to prevent collapse. Thus, they suffered only cosmetic damage Jan. 17.
Also, earthquake insurance is taken out on the buildings.
"In the 1980s, people paid a premium for California real estate," said Wylie Greig, director of real estate for The REEF Funds, San Francisco. During the economic downturn that has plagued California so far in the 1990s, the premium has been "squeezed," according to Mr. Greig.
"Natural disasters don't adversely affect what was already a negative perception," said Mr. Greig. The affect on returns will be a property-specific issue."
In the short term, returns of buildings that survived the earthquake could be enhanced as displaced tenants look for space to resume operation of their businesses.
About 30% of RREEF's $10 billion property portfolio is located in California, said Mr. Greig. Properties the firm owns on behalf of others suffered minimal damage, he said.
"There is some evidence that when there are buildings damaged by earthquakes, the market tends to tighten up in the short term," said Mr. Greig. "There was a tightening in the office market in San Francisco and Oakland in 1989. It (the tightening) doesn't change a soft market into a strong market," he said.
Two office buildings that are part of a real estate investment trust managed by Franklin were slightly damaged by the earthquake, said Mr. Burton. The damage totaled $2,000.
"One of our major requirements is (buildings) meet certain earthquake standards," said Vince Martin, managing director with TCW Realty Advisors, Los Angeles. "We spend a lot of time evaluating them before we buy them.
"If they don't meet the criteria, we don't buy. We also upgrade their seismic capacities, and we carry earthquake insurance.
"A lot of buildings engineered under the new standards performed as they were designed to perform."
About 20% of TCW's $4.5 billion portfolio is in California, and The Tower, a 13-story office building in the San Fernando valley, was damaged enough so it could not be occupied the day after the earthquake.
It will take about three months to repair the building, Mr. Martin said.
Part of a commingled fund, the cost to repair The Tower will have a negligible impact on the fund, said Mr. Martin.
The smart money already had begun to trickle into California real estate, but it is too early to tell what effect the earthquake will have on that trend, said Mr. Martin.
The riots, fires and mudslides -three of California's four seasons - didn't discourage the flow of investment, noted Mr. Martin.
"The market should still be OK," he said. "Commercially, there is only one property that was damaged, and it was the Northridge Fashion Centre."
Two of the four parking garages in the center suffered extensive damage, and the six anchor stalls all were damaged to varying degrees. The mall is expected to reopen in parts by summer.
"It will be a solid year from now before we are firing on all cylinders," said David Gruber, president of MEPC American Properties, which owns the mall.
The Yarmouth Group last month sold Northridge Fashion Centre to Dallas-based MEPC. Its parent is MEPC PLC, London, a publicly traded company whose shares are two-thirds held by U.K. pension funds and insurers.
According to Mr. Gruber, the shopping center was part of a six-property portfolio for which MEPC paid Yarmouth $350 million. He said full modernization of the center already had been scheduled for early 1995; now, the work will begin next winter.
"You have to pick yourself up and dust yourself off and start all over again," Mr. Gruber said.
