The Art of Extreme Value Investing in Real Estate

San Francisco Office Values


Real estate can be a very volatile asset with extreme highs and extreme lows, especially in certain urban areas. This leads many to question how or when to invest; the key to Extreme Value Investing in real estate is patience.  In the right location and with the right product type, real property will rise over the long run at a pace beating inflation, potentially significantly. An example of this may be found in the realm of commercial office properties, which have the most extreme volatility of all the real estate asset classes.  Los Angeles office values have dropped from 40 to 70% during market lows, offering a great opportunity for extreme value investing.  Apartment building rents and values are much less volatile, as apartment values have dropped from 5% to 40% during the last five recessions in Los Angeles. Though investors may become impatient as the amount of time between cycles can vary greatly (recessions since the 1970’s have arisen in as short as five years and as long as ten years), the key is to wait patiently for these periods to occur and then strike aggressively.  As Warren Buffet says, “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot.”

Supercharge with Trend Spotting

You can supercharge your extreme value investing by acquiring properties in areas most favorable to long term appreciation: gentrifying locations, emerging property types, and areas oversupplied but with a great future otherwise.  In the 70’s, Century City was a new office market that was horribly oversupplied.  The oversupply gave rise to extremely low rents that encouraged many firms to move to the Westside to take advantage of a reduced commute.  The concentration of similar firms produced agglomeration economies that made Century City even more popular.  In the early 90’s, Santa Monica was rich in amenities and a new growing market but was oversupplied with distressed office buildings.  Santa Monica, with all of its amenities, was destined to take advantage of the growing movement of entertainment firms off the studio lot and to the Westside near their talents’ homes.  In the 2000’s, SOMA in San Francisco was over supplied with creative offices due to the dot com bust but had a growing concentration of young software engineers. More recently in the last recession, Playa Vista represented an area of over supplied office space and cheap warehouse conversions. Again the large concentration of affordable creative offices attracted large tech companies that made Playa Vista even more popular during the recovery and sharply drove up rents. Despite the many examples of similar investment opportunities, you must be careful to distinguish between cyclical oversupply and long terms changes in socioeconomic circumstances.  High-rise offices in Downtown Los Angeles never came back as large corporations left Los Angeles and others moved to the Westside. Retail malls will probably never come back.   You must spot the right trends which  despite the oversupply or over-pricing in the expansion, will give birth to great opportunities during the contraction.

Recognizing a Cycle Bottom

Extreme Value Investing requires one to wait for recessions and then attempt to recognize the bottom for commercial real estate.  The anatomy of the bottom looks as follows: during the fall, you will not be able to rent much of anything and each deal will be at lower and lower rents. Values will fall significantly below their former peak and even below the long run trend line. Even values of high future growth properties will fall significantly below trend line.   Eventually, however, rents and occupancy stabilize; some landlords will be able to start leasing space painfully slowly at lower rents.  But for each successive lease deal, the rents, although low, will be at the same rate or higher. With these trends in mind, you will know when you are in a period of extremely good values.  Each period of such opportunity will seem like the best of your career.  The great extreme value investor Sam Zell wrote the following in 1976 in his article “The Grave Dancer”:  “The opportunity of acquiring real estate in its current distress offers the greatest single economic opportunity for investors in our time, one that is not likely to occur again.”  I am sure Sam would disagree with himself today.

Extreme Value Investing Can Be Long Term Investing

Though we have discussed how to spot the valleys in a cycle, we have found it very difficult to spot a peak.  Well located properties will eventually rise significantly above their long run trend line.  If we have to sell to balance our portfolio, replenish cash positions, lower risk exposure or satisfy investor demands, we will wait for this period to do it.  However, there is no predicting the peak, as prices can and often will continue to rise even more. Warning signs can abound of lower credit spreads, cheap aggressive debt, low cap rates, tailwinds, and values priced to perfection and extraordinarily over the long term trend line.  Politician will turn away from creating jobs and instead focus on the ills of prosperity: congestion, traffic, and inequality.  But value will still go up until it blows, and the higher it goes the more it blows.  A savvy Extreme Value Investor will still utilize  this period to monetize and aggressively create create value in his existing portfolio.  The Extreme Value Investor may continue to hold properties to take advantage of long run upward trends and tax advantages of holding real estate properties in California.  But during the downturn, this legacy portfolio may become a liability as you battle falling rents and occupancy.

Build Strong Value Add Capabilities

You will be dealing with your own properties under stress (vacancies, tenant and investor defaults, evictions, collapsing credit lines, falling rent, credit freeze, and uncooperative lenders), and new properties that you acquire may initially be in distress.  You must be a skillful value add operator and have people who know how to solve problems to steer your existing portfolio and your new acquisitions during this time period.

Pitfalls of Extreme Value Investing

There are several problems with Extreme Value Investing.

Your Existing Portfolio Will be Under Stress. If you have an existing portfolio – especially of offices – you will be in survival mode.  It is important to prepare your portfolio for this period of stress and operate accordingly.  To prepare, you will need to sell, carry significant cash reserves, try to have good credit long term leases, staggered expiration schedules, and extended debt maturities.  No matter what type of investor you are, you must be prepared to survive the carnage and economic violence of the downturn.

Leasing New Deals Will Be Difficult. You will be buying when leasing will be very difficult, and you may need to endure negative cash flow on the new acquisitions (or hopefully just low returns) for an uncertain time period.  You must have the skill and ability to manage through this period, as all new properties will be value add.  You must be a problem solver because you will be buying properties in some stage of distress. You will need to find creative ways to lease, cut costs, and manage cash flow.  As Sam Zell wrote:  “Grave dancing is a art that has many potential benefits.  But one must be careful while prancing around not to fall into the open pit and join the cadaver.  There is a thin line between the dancer and danced upon.” However, I would suggest that you try to stretch your criteria. During these periods, I have always bought too little and later regretted it.

Extreme Value Investing is Hard to Scale.  During the 90’s, we bought distressed offices and warehouse and used creative office conversions to fill them.  We were one of the pioneer creative office renovators at the cusp of the great trend.  But when the opportunity of extreme value investing ceased, we left the market and failed to scale the business.  If you also leave the market once opportunities cease, you will not be able to build an ongoing development and renovation business.  When you leave the market, you will lose sources, contacts, vendors, talent, technique, and employees.  You must scale quickly because the opportunities will be short lived.

You Will Pass Up Many Opportunities: Many real estate investors get rich hitting singles, doubles, triples and having occasional strike outs and home runs.  They build large organizations and large portfolios and take their lumps.  When Buffet was asked on Bloomberg (August 30, 2018) whether he was followed his own adage today to “be greedy when others are fearful and fearful when others are greedy,” Buffet responded, “I love it when there is fear – I don’t love it for the country as a whole – but that creates prices that make me want to shovel the money out as fast as we can – but we have been shoveling the money out anyway. That (extremely good value) will happen from time to time but you cannot sit around and wait for it.  You are never going to catch the bottom and everyone will be terrified at that time.  We just keep buying as long as we find something attractive.”  In contrast, the Extreme Value Investor will wait for each cycle and pass on many good opportunities waiting for a fresh crop of extremely good values.

Rip Van Winkle.

As Sam Zell wrote in his 1984 sequel:  Return of the Grave Dancer:  “Like Rip van Winkle, the Grave Dancer hibernates from one real estate cycle to the next.  He emerges from his long sleep when the real estate community violates George Santyana’s 1906 admonitions, ‘Those who do not learn from the past are condemned to relive it.’”


Google To Open Major Westside Campus At the Former Westside Pavilion

google westside pavilion

Rendering of New Google Campus at Westwood Boulevard and Pico Boulevard


10951 Pico Boulevard Offices Sign

10951 Pico Boulevard Creative Offices are pleased to welcome Google to the neighborhood.  We posted on our building that we were in Silicon Beach East.  Now it is happening.

Source: Google To Open Major Westside Campus | Venice, CA Patch

PMI’s Digital Bungalows in Santa Monica Pays Homage to Heidi Lamarr and Nicolas Tesla in Two New Murals

PMI has just completed two new murals at 2932 Nebraska, a creative office property in Santa Monica known as the Digital Bunaglows. One is of actress and inventor Heidi Lamarr. Heidi Lamarr stands out not only for her work as a famed Hollywood  actress in the 1940s but also as one of the pioneers in radio frequency that formed the basis for wifi. Nikola Tesla is credited as the inventor of direct current electricity.

Nicolas Tesla



Ranger & Fox snags lease at Marina Studios


PMI is proud to announce that Ranger & Fox leased a 943 sq ft office space located on the ground floor of our creative office building located at 4223 Glencoe in Marina Del Rey. Industry Partners represented the tenant and Lee & Associates WLA represented the landlord to help consummate the three year lease.

Ranger & Fox is a design-driven motion studio that creates solutions through image and motion by specializing in visual communication and strategy. The company was started in 2017 by two visionaries who dreamed of creating a 3D studio together. Now a young studio, Ranger & Fox’s clients include UFC, HP and Paramount Pictures. They have also snagged a few Telly Awards for their work in visual content and design.

4223 Glencoe (aka Marina Studios) offers creative working space and is perfect for smaller tenants who desire proximity to Venice Beach and Playa del Ray along with various coffee houses and restaurants.

Luxury Presence lands 4,075 sq ft lease at 1808 Stanford at PMI’s Digital Bungalows in Santa Monica


1808 Stanford

1808 Stanford Exterior

Luxury Presence designs websites especially for high end residential real estate firms and properties for sales. The 4,075 sq ft lease was signed for a four year term with both the landlord and the tenant represented by Lee & Associates WLA.

Luxury Presence utilizes website and brand development to establish an online presence for real estate agents and brokers. They are well known for their award winning design and innovation that features sophisticated and minimalist websites. Their brand strategy and website design is used by the top real estate professionals all over the country and is continually renowned for the brands that they build.

The Digital Bungalows at 1808 Stanford, Santa Monica, is a creative office designed to foster the creativity and inspiration in our tenants and their employees.  Other notable tenants include the Goop and jazz musician Marcus Miller.

Vertical Networks signs lease for 9,432 sq ft at 2644 30th Street

2644 30th Exterior

PMI is proud to welcome Vertical Networks to 2644 30th Street in Santa Monica for their corporate office. Vertical Networks is filling the 9,432 sq ft space on the 2nd floor of the building for 7 years and 4 months. Their new space will include 2 production studios. The office is located across from Snapchat, who Vertical Networks produces content for.

Vertical Networks is a content- creation studio that produces that biggest mobile shows and channels in the world. These shows include Solve, Ghost Hunt, and Styled by Science. Vertical Networks shares content through mobile devices only, in videos and channels that are meant to inspire and be shared. The wide variety of shows produced is meant to take the viewer out of their comfort zone through their 10 original series per year. Videos are released daily to their wide range of demographics that is continually growing.

Vertical Networks published their 1st video in July of 2016.  By July of 2017, Vertical Networks reached 10 million subscribers, which is a huge accomplishment for content creators.

Lee & Associates WLA represented the landlord and Avison Young represented Vertical Networks.



The Costa-Hawkins Rental Housing Act was passed in 1995 to prevent cities from passing or continuing excessively severe rent control measures. Only 15 California cities have a rent control ordinance, and any city can still pass a rent control ordinance that applies to apartments built before 1995. Costa-Hawkins does not prohibit rent stabilization, but instead it 1) limits rent controls to apartments built after 1995 or those previously exempted, and 2) exempts condominiums and single family homes (more specifically, lots with only one dwelling unit). Costa Hawkins also allows units that have been vacated to be released at the market rent (“vacancy decontrol”). The purpose of Costa-Hawkins was to encourage the new construction of apartments and to support reinvestment into existing apartments. Even before Costa-Hawkins existed, the Los Angeles Rent Stabilization Ordinance applied only to apartments built prior to 1978 and allowed for vacancy decontrol  So why is Prop 10 – an initiative to repeal Costa-Hawkins – up for vote in November?



Over 80% of the apartments in the City of Los Angeles are already rent stabilized, meaning there are plenty of rent controlled apartments in Los Angeles for tenants to rent. So what’s the issue? Simply put, it’s not a rent control problem, it’s an allocation problem. Many people on fixed incomes continue to rent the other 20%, and many people who are going to move or have high / upward trending incomes live in rent stabilized apartments. It seems that most long term tenants do not see the premium of being in a rent stabilized apartments; perhaps it is time to make tenants initial a paragraph stating, “You acknowledge that you are renting a non-rent stabilized apartment and there is no limit on how high your rent may be raised in the future, versus other apartments that are rent stabilized.” Most landlords don’t even bother to advertise rent stabilization as a feature since tenants don’t seem to care whether the property is rent stabalized or not when they rent.  Here is a line from one of our management companies’ adds: “Rent Controlled: Yes! This building is covered by LA rent-stabilization. If you move in, except in certain very rare circumstances, you would have the right to stay for as long as you want. Even better: Any rent increases would be limited by city law.” Instead of trying to repeal Costa-Hawkins, we should be focusing on educating tenants and getting people who depend on rent control into the housing that suits them. Maybe then we can see that Costa-Hawkins actually works in tenants’ favor, and its repeal would only harm them.


As a landlord, I still reinvest in my rent stabilized apartments. Why? Because when tenants move out, I can raise the apartments to market. As a result, I must keep the common areas and exteriors looking good to attract new tenants; I must make improvements to the apartments, I must refurbish and upgrade. Rents are increasing not only because of the late cycle vibrant urban economy, but also because landlords are smoothing ceilings, installing wood-like floors, dishwashers, stainless steel appliances, new vanities, new tile, quartz countertops, in-unit washer dryers, new exterior paint, new landscaping, new common areas floors, repaved parking areas, new plumbing, and new roofs. Without the vacancy decontrol provided by Costa-Hawkins, the common areas and exteriors in many buildings would decay to the point of being barely habitable. Without Costa-Hawkins, the rent stabilized tenant will not get the benefit of the renovations landlords make to attract the new tenant. The rent stabilized tenant will live in a far less desirable home, in a far less desirable neighborhood, and will wonder what went wrong.



Some rent control advocates argue that vacancy decontrol encourages bad actor landlords to illegally harass tenants to move. While this may be true, we do not blow up the village to eliminate a few bad actors. Instead, we raise the penalties and increase enforcement. We can also increase support to vulnerable tenants – in San Francisco, the city provides free legal counsel to tenants in some cases. The knife cuts both ways here too, as there are also bad actor tenants who abuse the eviction system. There will always be people in this industry, landlords and tenants alike, who try to take advantage of their situation. But using a few shady landlords – who should see harsher penalties – as an argument against Costa-Hawkins and vacancy decontrol, is short-sighted.


How would you like to open up Craigslist and find zero apartments listed? That is exactly what could happen if landlords are forced to rent vacated apartments at under market rents. In fact, it has already happened – in Santa Monica, before Costa-Hawkins. If a landlord advertised such a unit back then, he would get hundreds of callers, all desperate to get the deal rent.  Many landlords withdrew their apartment units from the market.   In New York under vacancy controls (which were repealed), some landlords resorted to a black market. You had to pay a broker to help you find a below market rent apartment; someone had to do you a favor; you needed to know someone.   In those days, tenants were advised to check the obituaries to find an apartment. In order to get my Santa Monica rent controlled apartment in the very late 1970’s, I rang door bells; I called managers every week; and I sent letters on how good of a tenant I would be. I even offered to post a six month security deposit (you could do that in 70’s). For a more current example, look at how hard it is to get into a senior housing apartment now, and then imagine that spread across the whole city.

This is the situation we would find ourselves in, post Costa-Hawkins where a City adopts harsh vacancy controls. I do not know exactly who vacancy control protects, just that it causes market disruption. Thanks to vacancy decontrol, you can hop on your computer, go to Craigslist or other rental sites and find numerous rent stabilized apartments any day. But if Prop 10 passes, that may not be the case in cities that pass vacancy controls.


If rent control is pushed onto single family homes and condos, Owners/Landlords will likely opt to sell rather than rent, as the price to rent disparity increases over time. This process will radically reduce the number of single family homes and condominiums for rent.  In Los Angeles, most renters cannot even come close to affording a single family home and could very well find themselves with severely limited options. Costa-Hawkins is an important safeguard for families who want to live a home but do not have the option of ownership.


Some Prop 10 advocates argue that, because new apartment construction is occurring in San Francisco and Los Angeles, rent control does not discourage new construction. But the truth is just the opposite – this new apartment construction shows that Costa-Hawkins has worked. Costa-Hawkins exempted rent stabilization on new construction (for units built after 1995, the year Costa-Hawkins was passed), and froze any previous exemptions. Investors did not believe it at first and thought that such protection would be repealed. Eventually, over the years, investors gained more faith that the new apartments they invested in and built would be exempted from rent control, because their investments were protected by Costa-Hawkins. As long as investors believe that their new investment is protected, they have shown they will invest and build under the right economic environment.

Even the most ardent rent control advocates agree that some period of exemption is needed to encourage development. In the late 1970’s, before Costa-Hawkins, exempting new construction was part of the rent control ordinance.  So would a tweak in Costa-Hawkins, instead of a repeal, be a solution? Maybe allowing  Los Angeles, Santa Monica, and San Francisco to extend rent stabilization to 1995 apartments would increase access to tenants but minimize the negative impact of rent control; the damage to new apartment development would be minor if developers and investors believed that this was a one-time extension and any new apartment investment was truly and permanently exempt. The dampening effects could therefore be lessened with a more liberal and consistent rent stabilization ordinance. Ultimately, we cannot control where new investment dollars go, and those dollars will go where the returns are most attractive given the same level of risk. Every time the rules change, new development is impacted because of uncertainty. The protection of new development is vital to assuring that investors continue to support the housing market, and Costa-Hawkins has been a fundamental aspect of this process.


Assuming investors continue to feel safe in their new apartment development investments, enough new supply will eventually help lower or limit rent increases. In Los Angeles, a few years of 15,000 – 20,000 apartment completions will eventually contribute to such an outcome. This effect will not be short-lived; history shows us that when there has been a significant increase in new apartment development, the rent decreases will be greater and more enduring. In the 1980’s, the supply of multifamily units surged in Los Angeles and in Santa Monica. These units were primarily condominiums (not subject to rent control and exempted) and not apartments. When the 1990 recession hit, many of these condominiums were converted to rentals. Not only did rents decline but they did not recover until 1998 – seven or eight years later. We have not had anywhere near the level of construction that existed in the 1980’s due to regulatory and zoning restrictions that have significantly raised the cost of new construction and lowered the supply.  Measure JJJ was a game changer and will produce massive amount of new apartment construction if we continue to permanently exempt new construction for rentrol.  We need to encourage development to help lower rents, rather than eliminate the predictability and risk reduction benefits that Costa-Hawkins affords investors of new apartments. It’s also important to note that rents are currently above their historical trend line, meaning a market correction will eventually come. At first, it will come in the form of concessions and stable rents. The trigger will then be a recession, which will cause a sudden sharp reduction in rents. The high rents that many tenants now struggle with are destined to lower, as long as new apartments continue to be built.

So is a repeal of Costa-Hawkins really the answer for tenants? It will limit the number of available units, will lead to deteriorated housing, will discourage new development and will not help with high rents. We should instead consider merely tweaking the law, upping the penalties for harassing landlords, loosening zoning for multifamily, providing affordable housing incentives (such as that from Los Angeles Measure JJJ for transit locations and the opportunity zones), and working to direct the appropriate tenants into the already available supply of rent stabilized apartments. These changes, alongside the inevitable market corrections, could provide a better, long-lasting impact for all tenants’ benefit.