THE INCREDIBLE SHRINKING DEALS
Big-Money Deals Dried Up in 2001, but Smaller Private Inventors Filled the Void
By DANIEL D. WILLIAMS
The Orange County real estate market took a break from large deals in 2001.
After a record year in 2000, a watershed year for large-scale sales and lease deals, the market relied on making a lot of smaller deals rather than looking for the blockbuster. And that pattern held up in markets across the country. With the economy slumping, the big money from institutional investors dried up and smaller, private investors filled the void.
In the following pages, the Business Journal lists the top deals of 2001, from office to industrial, sales to leases. As 2001 kicked off, industry experts talked of taking a “cautiously optimistic” view of the market. But fears became reality and the market slumped further than most expected. The terrorist attacks of Sept. 11 sent markets into a further tailspin.
The effect was dramatic on the lists of largest deals, as companies almost universally decided to wait for better economic times before taking any large new spaces. Thus, 2001’s largest office lease deal, Safeco Corp.’s commitment to take 120,000 square feet in the yet-to-be-built Vantis project, is just a quarter the size of Verizon’s 470,000-square-foot lease in the Irvine Spectrum that topped the 2000 list. Meanwhile, this year’s industrial lease list includes just one deal for more than 150,000 square feet. Last year’s list had nine deals for 150,000 square feet or more.
On the bright side, Orange County fared much better than most areas of the country, including Northern California, which was sent reeling by the dot-com spinout.
For the year, the industrial market fared best, though it had low numbers, too, particularly in bringing new product to the market. The industrial market added 3.5 million square feet of inventory during the year. A drop from 3.8 million square feet in 2000 and 5.9 million in 1999, according to Jerry Holdner, vice president of market research in Voit Commercial Brokerage’s Anaheim Metro Office.
In general, the 2001 investment market volume was equal to the market volume in 2000, according to Louis Tomaselli, also of Voit.
“The number of industrial deals was very close, but the size of transactions were smaller and you had very few large portfolios available,” said Tomaselli.
In the late ’90s, you had value-added buyers come in and snatch up available property, according to Tomaselli.
“The type of product is pretty much gone now,” Tomaselli said. “We’ve gone though that cycle. Now we’re waiting for the next trend upward, but right now, the rents are fairly flat.”
Rents in the industrial sector are increasing approximately 4% year-to-year, whereas they increased up to 10% year-to-year during the height of the market.
Although sales of large industrial product slowed, they remained stronger than the lease market.
“The sales market stayed strong, especially with smaller property, but lease activity slowed down considerably,” said Ian Britton, a broker with CB Richard Ellis’ Anaheim office. Among others deals, Britton handled the 111,018-square-foot lease for T-Shirt City at Fullerton Crossroads. While it was one of the largest industrial lease deals of the year, it was actually a downsizing for the T-shirt manufacturer, which consolidated from more than 200,000 square feet.
Tenants are looking to control expenses after taking a bath last year. Instead of an expansion mode, they’re looking at the efficiencies found in smaller buildings that better fit their needs.
“Leasing was on the rise in 2000,” said Britton. “Everyone was in an expansion phase and a lot of companies bit off more than they could chew.”
Britton doesn’t believe that trend will continue during this year.
“As we come to March, we’ve seen people come off the sidelines. We see more pulse in the market,” said Britton.
But the market hasn’t recovered to the point that landlords are breathing easy. For the first time in years, landlords are cutting significant deals with potential tenants, even offering free rent to get tenants into their facilities.
“The landlords are more intent on keeping space filled than in getting top dollar,” Britton said.
Holdner does not see that trend holding up throughout the year because OC is running low on supply of product for sale, which will eventually push some owner-users toward leasing.
Holdner also cited shifting market cycles as another instrument capable of jumpstarting the market.
“This cycle took off in ’97, and a lot of people signed five-year leases, so many of those leases will be rolling over and people will need to make changes over the next 24 months,” Holdner said.
The same is true of the office market, though the immediate outlook is not as rosy. The office market built up an oversupply of inventory last year, adding 4.6 million feet after adding 4 million square feet in both 1999 and 2000. That growth trend will stop this year.
“I foresee construction really slowing in the office market,” said Holdner.
He pointed to rising vacancy and a surplus of available sublease space as reasons for curtailing new construction.
“Office space stands at almost 19% availability,” said Holdner. “That’s direct and sublease space.”
While the number is high, it pales against the 27% availability rate the county faced in the early ’90s, Holdner added.
There are also signs of pent-up demand, according to one source.
“We’ve identified up to 40 tenants who are looking at 50,000 square feet and above,” said Tm Joyce, senior vice president with the Irvine office of Colliers Seeley. “Their leases are due anywhere from 10 months out to three years out.”
Because of this early interest, Joyce predicts the office market will begin a recovery within the year.
When the leases are due, whether tenants will be looking to expand, consolidate or downsize, they’ll be moving, according to Joyce.
“I’ll think we’ll see a flurry of activity by either the fourth quarter of this year or first quarter of 2003,” Joyce said.
The apartment market was another segment that hit rough sledding in 2001.
The year started strongly, according to Sean Deasy, a broker with CB Richard Ellis. OC experienced record prices and huge deals well into the second quarter. But softening occurred during the summer.
“We saw vacancies going up and new product coming on-line, further diluting the market,” said Deasy.
Those events were soon followed by rent concessions as the apartment market lost its momentum.
“During the third and fourth quarters, we lost a lot of institutional buyers,” said Deasy.
Those market conditions were a good time for the private investors, who brought their money to the table, with interest rates looking promising.
“After Sept. 11, we had a two-week lull, where people didn’t want to talk business,” said Deasy. “After that, we locked in three deals below a 6.6 % interest rate.”
Deasy represented Rawhide Real Estate Ltd Partnership LP in one of the year’s largest apartment deals, the $21,750,000 sale of Arbor Park Apartments in Anaheim. Rawhide sold the property to Cadigan Arbor Park G.P.
But that deal was an exception for the year, as the number of apartment sales was off up to 35% from the 2000 figure.
“That was a record type year,” Deasy said. “There was a ton of institutional money, stretching to buy, because the market was so strong compared to the rest of the country.”
He sees that trend changing again in 2002.
“There will be a lot of product coming on the market, but it’s all existing product. Because job creation is more in line with the middle-tier wage earner, it’s more difficult to develop and sell a new building, rather than rehab a 25-year-old product.”
