So much for the symbiotic relationship between Orange County’s housing and commercial real estate markets.
Slumping home sales and prices in OC had little effect on the prices paid for office and industrial buildings here, which now are at an all-time high.
Office sales consistently crossed the $300 per square foot range, a big increase from the low $200s paid just a few years ago.
Likewise, capitalization rates,the expected return on newly acquired properties from rents and fees, continue to fall below the 5% mark for industrial deals, seemingly setting new lows almost monthly. If anything, the housing slowdown just convinced developers and buyers to focus their money on commercial buildings, local brokers said. In some cases, they opted to build offices where homes or condominiums previously were planned.
When it comes to office and industrial deals these days, “there’s more money than there is product,” said Gary Stache, executive vice president for the Newport Beach-based office of CB Richard Ellis Group Inc.
Market watchers say that the pace of overall office and industrial deals may have begun to decline a bit during the past year, compared to the hyper-charged 2005 market.
“The velocity of deals is down, but fundamentals are still very strong for the Orange County market,” said Kurt Strasmann, managing director for the OC operations of Grubb & Ellis Co.
Vacancy rates for office buildings run around 7%, while industrial vacancy rates are nearing 5%.
For the biggest and best commercial buildings, it’s a different scenario, Strasmann said. There’s no shortage of buyers, be it private companies, pension funds, tenant-in-common investors or private equity companies.
“There’s a tremendous amount of capital coming into the market, but there’s a finite number of opportunities (to buy),” he said. “So they’re being extremely aggressive.”
The 10 largest office deals here totaled about $1.1 billion last year. Sales for the top office deals have run $1 billion to $1.2 billion the past three years.
The value of the biggest industrial deals here totaled nearly $500 million last year, up from $313 million in 2005, and $170 million in 2004.
In the following pages, the Business Journal has published the top sales and leases of 2006 in the office and industrial markets.
CoStar Group Inc. provided the data, while brokerages also submitted deals for consideration. Sales are ranked by dollar amount and lease deals by square footage.
The Business Journal defines a deal as one building or an office park of one or more buildings. Deals that include big portfolios of separate properties aren’t included.
That excluded a number of sizable deals, such as the 19-property, 3 million-square-foot Orange County portfolio of Arden Realty Inc., which was bought early last year by the real estate investment arm of General Electric Co.
Office Deals: Fast and Furious
Big office deals came fast and furious at the outset of 2006.
The Irvine Company’s $540 million buy of Irvine Center Towers and Newport Gateway Center near John Wayne Airport took the top two spots for office sales last year. Both deals closed in January 2006, and went for about $385 per square foot.
At $325 million, Irvine Center Towers easily bested the size of 2005’s largest deal, the $261 million sale of MetroCenter at South Coast in Costa Mesa by RREEF America LLC.
The third biggest deal brought a new face to the local market. Tishman Speyer Properties LP of New York paid about $365 per square foot or $134 million in March for the two Newport Beach office towers that are home to chipmakers Conexant Systems Inc. and spinoff Mindspeed Technologies Inc.
Both the Irvine Co. and Tishman Speyer are potential big deal makers again this year, sources speculate. Maguire Properties Inc. is expected to offload some $700 million worth of local buildings this year to help finance the $3 billion acquisition of Equity Office Properties’ Orange County and Los Angeles portfolio.
Industrial Hot in Tight Market
A tight market for space and little new development made for a good year in the industrial sector.
Sales of distribution, warehouse and research and development buildings showed another strong year, with the value of the largest deals here increasing 58% in 2006 to $495 million.
Behind that: Nearly $200 million came from Lennar Corp.’s acquisition of industrial land and buildings around the second phase of its Platinum Triangle development in Anaheim.
Conversion of industrial sites into housing appears to have lost momentum, which could impact future sales.
Some of the properties on this year’s list, such as 2323 Main St. in Irvine, originally were slated for housing redevelopment but now are set to remain commercially focused.
Big Leases
Two of the county’s bigger professional services companies struck noteworthy lease deals last year.
In June, the Costa Mesa office of Deloitte & Touche LLP, OC’s largest accounting firm, signed a 12-year lease deal to stay at the Offices of South Coast Plaza’s 337,000-square-foot Park Tower. The building bears the accounting firm’s name. Deloitte’s renewal was for 125,000 square feet.
Rutan & Tucker LLP, the county’s largest law firm, also signed a big deal in November to stay at its Costa Mesa headquarters for at least another 15 years.
The firm’s new lease, for 112,000 square feet of office space at 611 Anton Blvd., extends and expands an existing deal that was set to expire in 2009. The building, part of Pacific Arts Plaza, is owned by Maguire Properties.
Rutan & Tucker reportedly spurned an offer to move to the Irvine Co.’s office towers being built in the Irvine Spectrum. The law firm instead decided to add an additional 12,000 square feet of space at its existing offices in Costa Mesa.
In 2005 and 2004, the mortgage industry was responsible for some of the larger lease deals in the county.
Taking big office leases were Irvine-based New Century Financial Corp., Newport Beach-based Impac Mortgage Holdings Inc. and Irvine-based Option One Mortgage Corp., a unit of H & R; Block Inc.
Mortgage space is still making headlines, but for reasons that the struggling industry would rather forget. Nearly 1 million square feet of mortgage-related space was put back on the market last year for sublease as the subprime sector continues layoffs and consolidation.
