Investors showed their faith in the office market recovery last year by bidding up prices on Orange County’s office towers.
Buying was led by Maguire Properties Inc., a Los Angeles real estate investment trust that snapped up the three biggest office complexes in 2004.
Investors here see rents on the rise amid an improving economy and little new development.
In fact, sales were hot across the board of offices, industrial buildings, shopping centers and apartments, brokers said. Leasing was mixed, with office picking up and industrial flat, they said.
In the subsequent pages, the Business Journal has published several lists of the top sales and leases of 2004 in office, industrial, retail and apartment markets.
CoStar Group Inc. provided the data and brokerages also submitted deals. Sales are ranked by dollar value 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 a portfolio of separate properties are not listed.
Brokers began 2004 cautiously optimistic, according to Sherry Bower, who heads CB Richard Ellis Group Inc. in OC. She said at first they were worried about fallout from the Iraq war and possible interest rate hikes.
But an uptick in office leasing and some upward movement in office rents buoyed investor confidence, she said. Future rental hikes should offset interest rate hikes, she said.
Bower said money flowing into real estate “continues to be robust beyond our expectations.”
Indeed, prices per square foot for premium office buildings shot up last year. They started at under $200 per square foot and ended above $300. Of course prices vary depending on a building’s rental rates, occupancy, location and condition.
Maguire followed the trend.
At the beginning of 2004, the real estate investment trust paid $150 per square foot for offices at Park Place, a sprawling commercial campus in Irvine. That was the biggest office sale of the year at a total of $260 million.
One reason the price per square foot was low: Maguire took on $164 million in debt from New York-based seller Blackstone Group LP.
Later in the year Maguire bought the rest of Park Place,the No. 2 office sale at $215 million. In fall, Maguire also closed the No. 3 deal: the $151.2 million acquisition of Washington Mutual Inc.’s campus in Irvine.
The campus includes four low-rise class A office buildings totaling 415,597 square feet, as well as land zoned for another 145,270-square-foot building and 2,610 parking spaces.
Factoring out the value of additional land and parking, the sale price per square foot of existing buildings is about $291, according to Maguire.
Sales prices have been rising for several reasons, including the anticipation of rising rents, said Bob Smith of CB Richard Ellis’ Newport Beach office. He expects rents to increase as much as 10% during the next year.
Other brokers weren’t as bullish, but all brokers interviewed said class A rents should rise somewhat this year.
Smith represented Washington Mutual in its sale. He was involved in four of the top 10 office sales last year.
It costs more today to build a new building, which is another reason why investors are paying top dollar for existing buildings, Smith said. He cited higher land prices and higher prices for steel and concrete.
“Rental rates will need to be substantially higher before we see new speculative office buildings,” Smith said.
Newport Beach-based The Irvine Company, which has a reputation for being cautious, bid on a high-rise here last year for the reasons outlined by Smith, sources said.
The company logged the top bid last year for an office tower at 2040 Main St. in Irvine. But you won’t see its name on the list of biggest acquisitions.
That’s because law firm Knobbe, Martens, Olson & Bear LLP exercised a right in its lease to match the highest bid and walked away with the building for $106.5 million,the No. 4 deal on the list.
Knobbe paid an eye-catching $345 per square foot for the 14-story high-rise, according to CoStar. Sources said Knobbe wanted to avoid future rental rate hikes.
The law firm also got a relatively new building, built in 2002 by the Irvine office of Phoenix-based Opus West Corp. It’s 95% full.
One sizeable deal not included on the list was Mission Viejo-based Mammoth Equities LLC’s $62 million acquisition of two office parks in Cypress from Newport Federal. Since the deal included two separate office parks, it didn’t make the list.
Still, the deal is worth noting, in part as an example of the growing might of companies like Mammoth Equities, which pull together individual investors.
These investor groups share ownership in a structure known as tenant-in-common. They typically have sold another property and want to avoid capital gains taxes by using a portion of the tax code dubbed a 1031 exchange.
Alan Pekarcik, Dan Vittone and Rob Mitchell of Voit Commercial Brokerage LP represented both parties in the Mammoth deal.
Office Leasing
While not as dramatic as sales, office leasing picked up last year, according to sources.
Once again OC’s mortgage companies accounted for several top deals. In fact six of the top 10 involved mortgage companies.
“There is no question mortgage has been leading the way,” said Kurt Strasmann, managing director in the Newport Beach office of Grubb & Ellis Co.
He said other professional services and tech companies are leasing more space these days.
Still, mortgage companies utterly dominated the top 10 last year, lead by HomeLoanCenter.com’s No. 1 lease for 161,344 square feet in the Irvine Spectrum.
Fremont Investment & Loan, the Anaheim-based unit of Santa Monica’s Fremont General Corp., had the No. 2 deal last year with 104,662 square feet in Brea.
Other mortgage companies in the top 10: No. 6 Brea-based Residential Mortgage Assistance Enterprise LLC took 79,897 square feet in Brea; No. 7 and No. 8 were both by Pasadena-based IndyMac Bancorp., for a total of 140,000 square feet in Irvine; and No. 9 Acoustic Home Loans took 67,000 square feet in Orange.
Brokers have been wary for sometime that rising interest rates would kill the growth of mortgage companies and possibly cause them to give back space. But so far long-term rates haven’t budged.
The Industrial Scene
Small industrial buildings for sale remained robust last year, according to brokers. That’s something you won’t see on the list. But brokers also said larger buildings sold well.
Leasing, however, was a mixed bag in 2004. There were some big deals, but some brokers said leasing moved sideways last year.
Still, with a vacancy rate of 4.28% in OC, there isn’t much space out there, according to Voit Commercial Brokerage. Result: some modest rent hikes on the horizon.
The top 10 list of industrial leases is much more varied than for the office market. The biggest deals mostly were for distribution, with some manufacturing.
The biggest deal last year was by Home Depot Inc., which took 447,005 square feet for its Expo Design Center unit.
Houdini Inc., which is known by the Wine Country Gift Baskets name, had the second-biggest lease of the year with nearly 400,000 square feet in Buena Park at Knott Distribution Center.
The company is using the facility to assemble and distribute gift baskets, which include items already made, such as gourmet chocolate bars and wine.
Other companies taking space were involved in electronics, sunglasses and shipping.
