There has been a lot of chatter about when Orange County will see the bottom of the commercial real estate market. Between continued job losses and rising vacancies, few think we have hit it yet. Business Journal reporter Mark Mueller queried local experts about what they expect for the rest of the year. Here are their edited comments.
Robert D. Voit
Founder, president
Voit Real Estate Services
The national recession, unemployment and illiquidity in the capital markets have contributed to massive property devaluation of commercial real estate. Tenants are downsizing their space needs and looking at ways to reduce their occupancy costs. Property owners are feeling this lack of tenant space demand and are experiencing difficulty in leasing or selling their projects. In addition, about $500 billion in commercial mortgages are maturing in 2009 and 2010.
The lack of tenant demand and limited commercial refinancing options are powerful forces that are creating a class of properties identified as distressed commercial real estate. Owners of troubled commercial real estate buildings with near term loan maturities will likely be forced to add new equity to restructure their existing loans or face foreclosure.
In OC, the St. Regis resort in Monarch Beach is just one example of the size and quality of properties that will be involved in the distressed property situation. Clearly, it is not just old buildings, or office buildings, that will be hit by this, but instead will include all classes and all types of commercial properties.
John Combs
Founder, principal
RiverRock Real Estate Group Inc.
Will there be positive job growth in OC by year’s end? What about in 2010?
Until job growth is positive, there will continue to be a very soft office market. With more than 114 available office floors in OC, the reality is that rents will continue to decline. As that happens, distressed assets will continue to be on lenders’ lists to watch and many owners will be forced to sell. We’ve already seen this happen with the St. Regis Hotel. Some properties will be given back to the lenders.
Large tenants in common and real estate investment trusts have laid off staff and now need professionals to help them with asset management and loan work outs. We will continue to see a shift in the growth of opportunities to work in this area. Many properties will be foreclosed on and sold in the next 12 months. The upside is that this will be a great opportunity for wealth generation in this next cycle.
Michael K. Hayde
Chief executive
Western National Group
The current economy has affected the state of the multifamily sector in OC, although not as greatly as other sectors in the industry. The high unemployment levels in the county have eroded rent growth, as well as reduced the number of renters seeking apartments. If the unemployment levels continue to increase, the county may see an increased loss in rental rates and even fewer renters. This has all been exacerbated by the availability of condominiums and single-family homes for rent in the market.
Apartment sales in the region have all but stopped. There is an increase in the returns that buyers are expecting, but sellers have been slow to lower prices. OC will see apartment sales prices decreasing in the second half of 2009 as current values are unrealistic as compared to current market return expectations.
In the past few years, debt was cheap and plentiful and many acquisitions were closed in this sector with little capital behind it. Those days are now gone. With the value of apartments falling, lenders will be more realistic about values and loan amounts going forward, thus driving prices down.
OC also will experience a surge in properties that are being returned to the banks and financial institutions, including the properties that were purchased with short-term debt within the past three years. This can be attributed to the lack of ability by current owners to obtain a new loan to pay off the one coming due.
The county will also experience very little new apartment construction based on the lack of available financing and the lack of rental growth across the board. Debt rates are on the rise and will continue down this road throughout 2009. For the remainder of 2009, apartment values will continue falling, rents will continue to decrease, mortgage rates will rise and there will be a loss of substantial previously perceived net worth in the market.
Al Beaudette
Chief executive
Attentus Advisors
The current business environment is causing all of us to rethink our businesses and how we operate. In challenging economic times we tend to focus on triage versus strategy. This has revealed itself through organizations cutting expenses to the bone and making sure cash inflow equals outflow. This is a tactic, not a strategy. It is a common reaction to the world around us, but it doesn’t position you or your organization for survival and future growth.
Throughout history, any time business and real estate have declined, there are many who have successfully reinvented themselves. The goal when you reinvent is to learn and grow from your previous mistakes in order to avoid making them again. Unfortunately, it seems our industry has a very short memory. Many of the same mistakes have been repeated once again.
Thomas Sherlock
Senior managing director
Buchanan Street Partners
Following a historically tumultuous start to 2009, hopes for recovery are finally starting to be realized, albeit slowly. Job losses are gradually decreasing, the capital market is showing signs of a thaw, and approximately 35 troubled banks have been closed, helping to cleanse the banking system of bad assets.
While these represent positive steps, the swing toward optimism is precarious. The attractive risk-reward investing structure in the near term is offering debt into the dearth of capital available to the commercial real estate industry, complemented to a lesser degree with the buying of assets from distressed sellers. We will be monitoring at least four important factors throughout the balance of the year, beginning with the spread between interbank loans and T-bills and 10-year Treasury yield. If the capital markets seize up again or the massive stimulus package results in an inflation spike, improvements in the economy could be reversed quickly.
Second, measuring net absorption and effective rental rates will become more crucial than joblessness since the lagging nature of real estate suggests the bottom is still to come for commercial real estate investing. Next, we will closely watch the staffing at the FDIC to better understand the regulator’s intent to expeditiously resolve bad loans. Finally, we will assess lenders’ intent to utilize TALF funds and create new loan programs that will actually enhance liquidity to the industry. These factors will help determine the legitimacy of the current optimism and when a shift from a more debt-centric to a more equity-centric investment strategy is prudent.
Brandon Birtcher
Chief executive, president
Birtcher Development and Investment Co.
The key to getting deals done in the second half of 2009 will be to focus on conservative underwriting with attractive current cash flow, rather than on its future appreciation. This is a paradigm shift in a market flooded with uncertainty and doubt.
Predicting what will happen in the next six months is no easy task; however, the three key market areas to watch for the remainder of 2009 are flow of capital in the market, deal volume and value of the buildings being sold. The negative deal flow, as we see it, can be attributed to no money, no transactions and no value. It also will be important to watch for an increase in consumer confidence and how quickly residential recovers. If and how the market turns will be a telling tale for the commercial sector. There are no rules for the game being played at present,what is considered conventional today is now the unconventional.
Tom Reimers
President
Park Place Partners Inc.
From a land price perspective, we are seeing the light at the end of the tunnel. Over the next six months, residential land values will continue to find bottom in secondary and tertiary markets. Since distress hit the inland markets first, land values in primary markets such as OC remain a little further from stability as the downward price pressure resulting from foreclosures on de-velopment projects by lenders remains significant.
By the first half of the next year, we are expecting land prices to stabilize in the primary markets (including OC) and settle into a more predictable trading range. While the sale of both new homes and land parcels have picked up, we are not predicting land price appreciation as a rule until probably 2011. Still, wildcards re-main in the land market including government intervention and general economic stress.
