Industry Players and Analysts Give Their Take on the Current Market
The economy is no longer humming. The indicators are out there that OC’s commercial real estate industry is staring at a slowdown. But is it just a dip we soon will snap out of? Or has it gone beyond that? The Business Journal’s Daniel D. Williams asked a variety of real estate leaders and analysts for their take on the current market, asking, “Are we in a slowdown? If so, what is the extent of the current cycle?”
DOUGALL AGAN
Vice president of marketing
Foothill Ranch Co.
Personally, I am not seeing a slowdown. I just see there’s caution in the air. I saw a deep depression in the early ’90s, where we had an acceleration of growth that didn’t materialize.
The Internet is not being embraced to the level needed. But the tech markets we’ve talked to are being cautious about what is being done. With the Internet, so many businesses were going to derive benefits from that growth, but it didn’t reach that expectation and fundamentally, they are now having to make adjustments.
Now, we’re seeing businesses wait a little longer, but they have not just disappeared. We always know we’ll go through cycles, but we don’t view this as a recession. There are not those indicators out there. We’re not overbuilding. The money is there. The financing is there. Southern California continues to attract major employers. Senior management can continue to see positives. We didn’t overbuild as other areas did, and we’re not having the same level of space come back on market.
The only section or niche that saw construction overbuild the demand was the flex tech market. But I don’t see that lasting for very long.
If you look in other markets, you’re seeing products sitting on the market vacant for a year.
We have a distorted view here (in Orange County) compared to the rest of the market. Here, we get concerned if we don’t achieve 80-90% lease. It’s still strong. I think it’s more of a stable market climate with cautious decisions being made, but fundamentally still strong.
CLARENCE BARKER
President, Investment Properties Group
The Irvine Company
Economic cycles have a direct impact on the real estate industry. We have to be adept enough to manage through economic slowdowns. Technology companies are clearly taking a breath. However, there’s no question that the high tech industry is and will continue to be a strong component of our economy. This industry will eventually emerge from its current difficulty. California has historically been very resilient and will find its way through this cycle. And, Southern California, with its diversity of industry clusters, has an advantage, in the meantime, as the area isn’t solely reliant on the technology sector.
JON BRINDLE
President
Alton Builders
In my conversations with brokers and architects, who see these things first and are the weathervane of commercial development, we’re going slower, particularly in the brokerage community. We (Alton Builders) are trucking along right now, but may be looking at a slowdown.
RANDY COE
Vice president, Anaheim office
Colliers Seeley International Inc.
Yeah, we’re in a slowdown. It has a lot to do with both the computer industry, and with corporate profits. Big major companies are being hit with earnings warnings. A lot of that comes into play with goods and services not being utilized the way they once were. That impacts real estate, because people aren’t looking for new or bigger places to work. All of corporate America is again trimming fat until demand increases.
We’re faring much better in Orange County than in the rest of the country. But demand for bigger box space, especially, has dropped off from the last two years.
Energy costs are a big factor, too. You have to look at the cost of doing business. It’s interesting to see a lot of companies, sitting on the sidelines. They are trimming the excess, trying to be more competitive and waiting to see what the economy is going to do.
I originally thought that in the third quarter things would gear back up. I’m not so sure anymore.
JOHN R. FRENCH
Leader of the Orange County practice
Ernst & Young LLP
We are probably in a slowdown. The indicators are landlords reducing rents and additional occupancy going up and full floor space becoming available. That’s very typical of the cycle. And we’re at the point in the cycle where investors are becoming more concerned about investing in new projects.
Of the projects that have been discussed, not all are going to come on line, which is also very typical of the cycle. And tenants are waiting until the last minute to negotiate leases, because as rents are falling, they don’t want to sign before it drops further. When product does come on line, tenants are waiting until the last minute to sign leases.
JERRY HOLDNER
Vice president of market research
Voit Commercial Brokerage
The interesting thing is, there are more transactions taking place, but we’re looking at less square footage than a year ago. We have positive absorption this quarter of 110,000 square feet.
On the industrial side, construction is more than it was a quarter ago, less than it was a year ago. But planned construction is down. Overall, activity in the market is down 9.75% from last year.
On the office side, construction, compared to a year ago is down 11%, although it’s up from last quarter. Planned construction is down 6% from last year. Also, there is a big jump in vacancy. It’s up 12.59% compared to one year ago, when it was 7.87%.
I don’t see prices coming down too much. Landlords are reluctant to raise or lower right now.
CHUCK HUNT
Vice president
Cushman & Wakefield
There is a slowdown, but I think we felt it more a few months ago. I think the activity level, over the last 60 days, has really picked up. When I talk with brokers, nobody is just sitting on their hands. Things that people have worked on may not see the fruits of that labor until August or September.
As for business objectives, we see that changing in the not-too-distant future. We think there’s a little bit of a spark here. If you stop the presses right now, you’d have to say yeah. But, there’s been a little bit spark. And that’s across the board, office, industrial, etc. Some brokers, are trying to exercise an option to expand early. If you have a good business plan as a company, maybe now is the time to gear up.
I don’t think anyone views it as a long-term situation. We weren’t talking about a lot of deals then. Now we are talking again. Tenants are more positive. Maybe there is something there.
TIM JOYCE
Senior vice president, South County
Colliers-Seeley International
I still maintain that after 2000 with 5.1 million square feet of absorption, the market can’t sustain that kind of activity. At that volume, there will be a point where the market slows down. A lot of water came out of the dam. Now, we have to fill the dam back up. The last six months, we have been in that mode.
Here we are at half a million of negative absorption. When does the pendulum start to come back?
The tenants, what are they asking? They’re retrenching. Or they’re going to downsize. Or grow.
A lot of financial companies want to go out and get new images.
By the end of the summer, September, tenants will come out on the marketplace.
DENNIS F. KATOVSICH
Senior vice president
McCarthy
We’re experiencing a slowdown, but it’s not a drastic dip. It’s more of a leveling off. Our indicators say it won’t last long. We’re so diversified we’re not going to feel it like other markets.
MARY ANN KING
Partner
Moran and Co.
I find the market for institutional property to be very strong. The problem is there isn’t much of this product in Southern California. There is not a very big survey size.
With interest rates at a 20 to 30 year low, people are able to use leverage to buy bigger property than normal. The cap rates in California are usually below the cost of long-term interest rates. This has allowed leveraged buyers to compete with pension funds and REITs.
Is the market softening? As long as rents and occupancies are firm, we’re OK, unless the economy deteriorates to the point they are impacted negatively. For now, we’re still watching.
PAUL LENTZ
President, Western region
Transwestern Commercial Services
In a sense, it’s taking a pause. Other parts of the country are in severe downturn. Here, we have a slowdown or are remaining stable. The net absorption is OK in a few markets.
I think it will stay this way through the third quarter with pressure on buyers and sellers to make things happen in the third quarter.
PAUL MARSHALL
Senior vice president of real estate development
Opus West
Are we in a slowdown? Absolutely. Compared to last the few years? Yes. The telling statistic is absorption. The actual statistical result of all of those is net absorption. We had record absorption in 2000. Today, the numbers are off. But remember, your demand has decreased, but has done so from a very, very high pace. If there’s a silver lining, supply has slowed, too.
ROB NEAL
Partner
Hagar Pacific
Clearly, we’re in a slowdown, but we like to acquire when there’s some uncertainty in the air.
Last week, the Anderson school of Economics at UCLA released an economic report. It’s the first report to project an actual recession for California. It’s the first to use the “r” word (“recession”) instead of the “s” word (“slowdown”).
I don’t think it will be severe. We won’t see anything approaching what we saw in the ’90s this time. In certain sectors, we’ll see problems. The edge cities are the first to go soft and the last to recover. In the South County the office segment has developed significant vacancy.
We believe this is a time of real concern. I think we’ll see something that is technically a recession, a couple of quarters of negative growth.
RUSS PARKER
Principal
Parker Properties
We’re definitely in a slowdown. Reality says we’re in a slowdown. And you see it from reading the business pages of the various papers. Still, we have our industry leaders and we still have demand. There are some positives to the market getting back to equilibrium. It’s still in an overbuilt situation, but that’s temporary. To get back into equilibrium, that’s the goal.
We were fortunate with The Summit, getting it fully leased before going on with the development. The good news is that new deals are going on weekly. Despite the bad news you read in the paper, there are deals going on out there.
There are some people out there looking, adopting a wait and see attitude. This summer or in the fall, they will need to make a move.
I think two years from now, we will be able to look back and say, “That downturn was pretty mild.”
MIKE VALENTINE
President
DMK
We’re in a curious position at DMK. Yes, there is a slowdown, however, we have our largest backlog in company history. It’s a backlog we’ve been building for two years. We are seeing slower activity, so we’re being cautious as far as hiring staff.
How long will this last? I hope it doesn’t last long. The last one seemed to last forever. Harry Dent wrote a book, “The Great Boom Ahead.” It says we are a consumer society. There is statistical data out there that we all reach our peak at 46.5 years of age. If that’s true, then the baby boom will reach its peak spending at 2007. So, to me, we still have a lot of oil in the ground, still to be pumped out. I don’t see us going in a reversal, a negative direction. Everyone’s a lot more conservative, so there’s not this glut of spec product out there. So, we’re somewhat bullish about having it turn around.
So I think I’ll call this a Gatorade break.
RICK WARNER
Vice president
CB Richard Ellis
We’re on a positive side, for the second quarter. We had positive absorption. We just hit it by 20,000 square feet. If you try to break it down, a big chunk of it was high-rise space.
We’ve had a pretty big number of absorption in Class A. South Coast Metro had the best market absorption. It might be reflecting Nexus coming on the market. We’ve seen in the last month or two a pickup in the market.
In the past, we’ve seen a little period of time with the market on fire. It was unrealistic, too much activity. Relatively speaking, right now is probably as good as ever, not counting those unrealistic times.
We see lot of deals in the market. We see a lot of demand in the product that is out there.
