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Running down Douglas Emmett’s Geographically-Concentrated Property Portfolio

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Focus on supply constraint markets

Douglas Emmett (DEI) targets markets with significant supply constraints and acquires class A office properties and premier multifamily communities. This provides a substantial competitive advantage in those particular markets. In addition, the company looks for properties with high-end housing and better lifestyle amenities.

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Heavy presence in nine submarkets

Douglas Emmett is mainly present in premier submarkets of California and Hawaii, and all of the company’s properties are concentrated in the following nine premier submarkets:

  • Brentwood
  • Olympic Corridor
  • Century City
  • Beverly Hills
  • Santa Monica
  • Westwood
  • Sherman Oaks and Encino
  • Warner Center and Woodland Hills
  • Burbank submarkets of Los Angeles County

In addition, the company is also present in Honolulu, Hawaii. The Sherman Oaks and Encino submarket was the company’s largest submarket in 2014, with a share of 22% of the total rentable square feet.

By comparison, the Warner Center and Woodland Hills submarket had a share of 18.7%, and the Beverly Hills submarket had a share of 12.1%. Honolulu came in at 11.2%, and Brentwood came in at 11.1% as of the end of fiscal 2014.

Increasing market share

Douglas Emmett is likely to continue focusing on its existing submarkets of Los Angeles County and Honolulu in order to increase its market share. In addition to its core markets, the company may enter other markets that offer similar characteristics that have a high probability of gaining substantial market shares over a short period of time.

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Regional regulations affect business

We should note here that Douglas Emmett’s Los Angeles and Santa Monica markets have rent control legislation that affects the company’s ability to increase rent levels. At the same time, its Honolulu multifamily market also has regulations related to low-income housing. Non-compliance with such regulations could lead to higher operating expenses for the company along with the loss of certain tax benefits and the forfeiture of rent payments.

Other heavy hitters in the office REIT (real estate investment trust) space include Alexandria Real Estate Equities (ARE), SL Green Realty Corporation (SLG), and Boston Properties (BXP), all of which follow a similar portfolio diversification strategy. The iShares S&P Mid-Cap 400 Growth ETF (IJK) invests approximately 0.5% of its portfolio in Douglas Emmett.

Now let’s move directly to Douglas Emmett’s tenant base and lease expiration.

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