If the Business Journal’s list of largest deals in 2007 was a school yearbook, most of the companies featured in it would long ago have tossed it into the back of their closet.
Investors looking for bargains amid the field of distressed properties in the marketplace these days would do well to flip through the 2007 yearbook in search of leads, though.
Of the top $1 billion in individual office, retail and industrial sales that made the list of top deals in 2007, at least half have gone back to lenders, been sold at steep losses or are in the process of being sold, according to our records.
2007 widely is considered the peak of the last cycle for the commercial real estate market, although warning signs of a crash had already begun to emerge locally with give-backs of space by area mortgage firms.
“People were not buying (properties) on rent assumptions that made sense, it was all based on price appreciation,” said Greg May, co-managing director for the Orange County brokerage operations of Santa Ana-based Grubb & Ellis Co.
Today’s Debate
There’s debate about whether some of today’s investors are making the same mistakes as their 2007 counterparts.
Brokers report an abundance of investors looking for buildings to buy, which is pushing sale prices up, especially for higher-end, well-leased offices.
Capitalization rates—the expected initial return from rents—have been falling for all types of well-leased buildings. That trend has continued despite assumptions that an overall market recovery and significant rent increases are still a few years away.
Some in the industry caution that just because buyers have come back doesn’t signal the commercial real estate market has recovered.
“We’ve seen (investors) do a lot of stupid things,” said Michael Hayde, chief executive of Irvine apartment investor Western National Group, speaking last month at a commercial real estate forum sponsored by California State University, Fullerton’s Mihaylo College of Business and Economics (see related story, page 24).
“(Investors) will always do dumb things, if you give them time,” said Bill Halford, chief executive of Irvine-based real estate investor Bixby Land Co., speaking at the same forum.
Pain was felt for just about every building type that changed hands at peak pricing in 2007.
Retail Re-Do
In the retail sector, the most expensive deal of 2007 was the nearly $100 million sale of Costa Mesa’s South Coast Home Furnishings Center. The recently built center was in the process of getting leased up when it changed hands.
The buyer of the property, a Costa Mesa-based entity operating as South Coast Home Furnishings Center LLC, had trouble keeping its furniture-focused base of tenants amid the housing crash. It defaulted on an $84 million loan to Grand Rapids, Mich.-based La Salle Bank Corp. the following year.
Newport Beach-based Burnham USA Equities Inc. closed on a court-overseen purchase of the 300,231-square-foot mall in 2009 for about $35 million. Last year it rebranded the site as the South Coast Collection, and is attracting a more diverse group of tenants to the mall.
Among industrial buildings, the second-largest deal in 2007 was the $46 million sale of 2001 E. Dyer Road. It’s a 366,471-square-foot building off Red Hill Avenue., near the stalled Tustin Legacy development.
A partnership led by Wilton, Conn.-based Commonfund Realty Inc. bought the building from Chicago’s First Industrial Realty Trust Inc., which had acquired the property the prior year for $38 million.
The building went into receivership last year and its occupancy levels plunged below 10% in ensuing months. Lakewood, Colo.-based Alliance Commercial Partners LLC bought the industrial building out of receivership earlier this month for $23 million,
Despite its discounted price, Alliance’s buy still is the largest for an industrial building re-ported to have change hands so far this year.
Among offices, the $130 million purchase of the four-building Orange City Square complex by Fairfield, Conn.-based General Electric Co.’s GE Asset Management and Birtcher Anderson Realty LLC in San Juan Capistrano was the priciest individual complex to trade hands in 2007.
An investment offshoot of Los Angeles-based brokerage CB Richard Ellis Group Inc. bought the 386,000 square-foot complex late last year as part of a foreclosure process.
Real estate sources estimate the complex, located near the Garden Grove (22) Freeway, changed hands for about $65 million.
Those ill-fated individual deals were just the tip of the iceberg. Our annual compilation of largest real estate deals doesn’t include larger portfolio deals with multiple properties.
Several billion dollars’ worth of offices here traded hands in such package deals in 2007. Many of them suffered the same fate as deals for individual buildings.
Maguire Effect
The biggest portfolio deal in 2007 was Maguire Properties Inc.’s record-breaking $2.9 billion buy of Equity Office Properties Trust’s former holdings here along with two towers in Los Angeles.
Maguire’s blockbuster deal included 22 local properties totaling 6.1 million square feet. For a time, it made Maguire the county’s second-largest landlord.
A majority of that space has since been turned over to new owners or is in the process of doing so. Some $500 million of office deals listed in this year’s Top Deals section involved properties once owned by Maguire, which now operates under the MPG Office Trust name.
Recent buyers of former MPG properties include Palo Alto-based Menlo Equities LLC, which bought the 415,000-square-foot Quintana office campus in Irvine out of receivership late last year for a reported $69 million.
Irvine’s LBA Realty picked up a second section of Irvine’s Park Place office and retail campus last summer for close to $98 million. Newport Beach-based Irvine Company a few months later paid close to $213 million for Costa Mesa’s Pacific Arts Plaza, an eight-building complex that Maguire had defaulted on the prior year.
A few more buildings that are owned by MPG and currently in default are expected to trade hands later this year, including Irvine’s 2600 Michelson tower near John Wayne Airport.
