Los Angeles has become the top investment destination for institutional capital, bumping New York out of the number one spot, according to new research from CBRE. In 2017, equity funds accounted for the majority of the institutional investment activity, increasing 60% year-over-year to $6.2 billion. Foreign investment activity also accounted for a significant portion of institutional funds, however, the number fell over prior years. We sat down with CBRE's George Entis, senior research analyst of capital markets and Michael Longo, VP, to talk about the surge of private equity activity in Los Angeles.

GlobeSt.com: Why is Los Angeles attracting so much institutional capital?

George Entis: Global and institutional capital prefers safe and stable markets and it tends to focus disproportionally on major gateway markets. The nation's five largest investment markets represented roughly one-quarter of all institutional investment in the U.S. last year. In Los Angeles, high levels of investment and a strong local economy have contributed to a confident investor outlook. According to CBRE's Investor Intentions Survey 2018, Los Angeles ranked as the top metro for property purchases for the third consecutive year. Nearly half of survey respondents—47%—indicated that strong economic fundamentals driving rental value growth was the primary factor that attracted them to their preferred metros. Global investors are also attracted to Los Angeles because Class A properties can be acquired at a relative discount when compared to other gateway markets, like London, Manhattan and San Francisco.

GlobeSt.com: What types of assets is this capital going to?

Entis: Office product was overwhelmingly the asset of choice, accounting for nearly 60% of institutional investment last year. That is a significant figure when you consider that institutional investment accounts for almost one-third of the entire CRE investment market in Los Angeles. Industrial and multifamily sales accounted for roughly 13% and 12% of the total, respectively.

GlobeSt.com: One of the common criticisms of Los Angeles is that there is not enough institutional quality product. Has that changed, or has it been difficult for institutions to place capital here?

Entis: Los Angeles was the largest destination for institutional capital last year and volumes have been elevated in the $9-10 billion range for the fifth year in a row so there doesn't seem to be difficulty in placing capital. The velocity of sales has stayed constant; however, the composition of buyers has changed. We are deep into an extended cycle and there is a scarcity of quality core product, so private equity funds are taking on the riskier deals, chasing value-add acquisitions and driving much of the activity in the institutional space.

GlobeSt.com: How much of this activity is from foreign investors, and why is L.A. a top choice for this segment of capital?

Entis: Foreign capital has been particularly active since 2014. About 20% of institutional capital comes from a foreign source, and while that's down from 37% in 2016, we are still talking about almost $2 billion in sales last year. Total volume last year, however, fell by roughly 50% year over year after seven consecutive years of growth, but the group of foreign investors is more diverse than ever. So, this is not a story of government capital controls restricting outflows from China but one of accelerated growth from private equity funds in a mature cycle.

GlobeSt.com: What is your outlook for institutional investment in L.A. this year?

Michael Longo: As the cycle matures further, there will be fewer value-add opportunities, but the pressure to invest the capital will remain, especially with heightened activity in the closed-end fund space. Also, institutions have doubled their portfolio allocations to real estate since 2010. Combined with record levels of dry powder, it's easy to have an optimistic outlook of continued, heightened activity this year. There remains great investment appetite for Los Angeles real estate, but because such a large concentration of the institutional commercial market has traded hands within the last 3 years there are less buying opportunities available today. This has created a large supply and demand imbalance, and very competitive bid situations for marketed deals.