Usually, one big office sale and a leveling of vacancy rates isn’t cause for celebration for commercial real estate watchers. But these days, they’ll take good news where they can find it.
“Fundamentals are slowly inching up,” said Kurt Strasmann, managing director of broker services for Newport Beach-based Voit Real Estate Services. “People are starting to feel a little more comfortable.”
Voit’s mid-quarter statistics offer some near-term hope for a recovery of Orange County’s office market. So does Kilroy Realty Corp.’s pending $103 million buy of 2211 Michelson Drive near John Wayne Airport.
But signs of a full-fledged recovery aren’t expected until next year.
The brokerage reports that as of the start of June, OC’s availability rate for the county’s 110 million square feet of office space has declined by about half a percent from the start of the year, when it peaked at around 24%.
Availability rate includes sublease space, offices under construction and space being vacated that’s not yet empty.
Chalk up the drop to more leasing, a lack of space being built and less space coming back on the market for sublease, Strasmann said.
“It’s the first quarter with that (declining) trend” since the market turned downward a few years ago, Strasmann said.
Voit’s predicting that availability rates will end the year down another half a percentage point, to 23%.
Similarly, core vacancy levels should level off at 18.8% by year’s end—good news for landlords, but still high enough for tenants to find a deal. Anything more than 10% is considered a favorable market for tenants.
“The bad news is that there’s tremendous oversupply, it’s still a tough road for owners,” Strasmann said.
Lease rates, which have fallen by nearly a third in the past 30 months, should drop another 5.3% by year’s end, according to data from Rosen Consulting Group, a Berkeley-based real estate consulting company.
Rosen, which advised Los Angeles-based Hudson Pacific Properties Inc. on the launch of a real estate investment trust, projects rents in OC will begin to increase in 2011, reaching a 6% annual growth rate by 2014.
Kilroy Buy
If it’s still a tough road for local owners, that didn’t deter Los Angeles-based Kilroy from making one of the more eye-opening deals since early 2008.
The Los Angeles-based real estate investment trust, whose local portfolio is largely made up of industrial buildings, is under contract to buy 2211 Michelson Drive, one of the office towers recently built in the area around John Wayne Airport.
Kilroy’s set to buy the 12-story Irvine tower, put up for sale by Houston’s Hines Interests LP and development partner Crescent Real Estate Equities LP of Fort Worth, Texas, for about $103 million.
That price works out to $380 per square foot for the 271,600-square-foot tower that opened in mid-2007.
It’s been more than two years since a larger, non-medical office building in the airport area sold for such a high per-square-foot price.
The last notable OC office to flirt with a $400 per-square-foot price was Newport Beach’s 117,440-square-foot Wells Fargo building at 4590 MacArthur Blvd. It was bought by Europe’s Ferrado Group for a reported $47 million in early 2008.
Among the newer Irvine office towers that recently traded hands, Maguire Properties Inc.’s former 3161 Michelson Drive tower sold a little more than a year ago for about $300 per square foot, or $160 million. Opus West Corp.’s 2050 Main Street tower was bought earlier this year for about $56 million, or roughly $177 per square foot.
The offices built by Opus and Maguire (now known as MPG Office Trust Inc.) had plenty of empty space at the time they traded hands. 2211 Michelson Drive is about 92% full.
Higher occupancy, high-caliber tenants and an environmentally friendly design made the building an attractive option to Kilroy, even with the higher price tag, industry watchers said.
Among recent deals, 2211 Michelson’s sale is “a high-water mark for the area,” said Jeff Cole, executive director at the Irvine office of Cushman & Wakefield Inc.
“Kilroy’s a believer that the market’s going to recover over the next one to five years,” Cole said.
Kilroy owned about 45 buildings totaling nearly 4 million square feet of space in OC at the end of 2009, with the bulk of that being industrial space.
The investor’s local industrial portfolio was close to 88% leased at the end of 2009, while it’s five-building office portfolio was half full at the end of the year.
In Irvine, Kilroy’s most prominent building is a 157,000-square-foot industrial building on Von Karman Avenue that’s been vacant for several years. The landlord’s looking to convert the site into housing.
The struggles are a sharp departure from a few years ago when local real estate was commanding record prices.
An older, 11-story building next door to 2211 Michelson sold for about $112 million in the summer of 2007, near the peak of the commercial real estate market. That 230,615-square-foot building, at 18301 Von Karman Ave., sold for about $486 per square foot, but saw the buyer, Chicago-based Hearn Co. default on the loan last year.
The building now is owned by an affiliate of Newport Beach-based KBS Realty Advisors, which had invested in the loan.
18301 Von Karman’s one of several Irvine offices that’s faced loan issues in the past
few years.
One of those is the four-building, former Washington Mutual campus now known as Quintana, which will likely be the next big local property to be sold.
Cole’s Cushman & Wakefield team is handling the receivership-facilitated sale, which saw former owner Maguire default on its loans last year.
Bids for the four-building property are due later this month. Cole said the high price paid for 2211 Michelson “absolutely helps” with the marketing for Quintana, which is a few blocks away at Von Karman Avenue and Main Street.
An asking price for the campus, which counts about a 30% occupancy rate as Washington Mutual Inc. (and later JPMorgan Chase & Co.) cut back local operations, hasn’t been disclosed.
Sources not involved in the sale expect the 414,595-square-foot property to sell for $65 million to $75 million.
