The prospect of higher rates has caused jitters among Orange County’s homebuilders, commercial developers, real estate brokers and construction workers.
Low mortgage rates have contributed to a housing boom during the past three years and helped shorten the last recession.
Attractive rates also have contributed to the frantic construction of small commercial buildings for sale, for much the same reasons as housing.
Higher rates could change all that.
Uncertainty about how fast and exactly when rates will rise only adds to anxiety among real estate players.
The Federal Reserve Bank is widely expected to raise short term rates another point or so during the next 12 months. In 2004, a 1.25 basis point rise in the federal funds rate to 2.25% didn’t budge long-term rates.
Economists at Chapman University foresee 30-year mortgage rates hitting 7.2% by the end of 2005, up from about 5.8% today.
Higher rates and tepid job growth in OC should lead to housing prices here dropping 7.4% in 2005, the first decline since 1995, according to the university’s A. Gary Anderson Center for Economic Research.
Chapman’s not the only one predicting an end to price hikes in housing.
In October, California State University, Fullerton re-searchers said local property values could drop by as much as 20% during the next two years. And the UCLA Anderson Forecast predicted the housing market would cool in Southern California in 2005, but stopped short of projecting price declines.
Chapman also foresees a 10% decline in housing construction to 8,405 houses, condominiums and apartments next year.
Homebuilders don’t share the gloomy prognostications of local universities.
Jonathan Jaffe, who heads operations for Miami-based Lennar Corp. from Aliso Viejo, said the impact of higher mortgage rates only can be judged if one knows why rates are rising.
If interest rates rise amid a booming economy, job growth and income gains, that’s OK, Jaffe said. But if rates rise as a result of monetary policy absent those positive factors, “that wouldn’t bode well,” he said.
Jaffe remains optimistic about 2005, saying that demographics such as population growth during the next decade should be even more favorable to housing than the past decade.
On the office side of real estate, the market should continue to improve in 2005, according to economists at the University of Southern California. The market is seen benefit from economic expansion and lower vacancies, according to the university’s Casden Real Estate Economics Forecast.
University experts said stronger job growth is needed to put the office market on really solid footing. Still, researchers said landlords should begin to see improvements in office rents during the next two years.
The sentiment is echoed by brokers. Grubb & Ellis Co. predicts class A landlords are set to jack up rates 7% in 2005 from about $2.32 per square foot per month today. Grubb expects the average vacancy here to drop, but only marginally, to 11% from 11.6% today.
Chapman predicts job growth to be a modest 1.4%, or 21,000 new jobs, next year. So far, there’s been a dearth of new office construction. The end result: a tighter market and greater power to landlords, said Kurt Strasmann, who heads Grubb in OC.
“I think office is very well positioned for 2005,” Strasmann said. “There are probably four or five speculative office projects that people are talking very seriously about.”
Two developers, Parker Properties LLC and Shea Properties, the commercial arm of Walnut-based J.F. Shea Co., plan to start construction in 2005 on low-rise class A space in Aliso Viejo.
Irvine-based Crown Realty & Development Corp. plans to start construction in summer on a six-story office building at Xerox Centre in Santa Ana. The company plans to finish in late 2006 or early 2007.
And the biggest deal of all: the Irvine office of Phoenix-based Opus West Corp. could break ground in late 2005 on 13-story, Opus Center Irvine III in Irvine.
Still, the prospect of higher interest rates could hamper the office market if they cause mortgage companies to give back space or if they dilute job growth, sources said. Mortgage lenders have been huge takers of office space in the past few years.
Another trouble spot: The run-up in the price of steel and concrete doesn’t appear to be letting up, sources said.
The double whammy of higher prices for materials and higher interest rates could hit small buildings for sale hard in 2005, Grubb’s Strasmann said.
On the flip side, companies that aren’t buying space are likely to lease it instead, which would benefit landlords as well as leasing brokers in the industrial and office markets.
PERSON to watch: PAUL MARSHALL
Paul Marshall plans to do it all during the next 12 months: high-rise housing, an office tower, apartments, shops and industrial buildings.
The gamut of projects marks the fruition of his labors, which began in 1997 with a simple assignment: build an operation in Southern California for Phoenix-based Opus West Corp.
Marshall chose Irvine as his base. Earlier this year he opened an office in San Diego to complement the Orange and Los Angeles counties offices. The San Diego office is working on a 300,000-square-foot industrial development in Otay Mesa.
Opus’ most ambitious,and riskiest,project for 2005 in OC is The Plaza Irvine. Opus and partner Scottsdale-based Geoffrey H. Edmunds & Associates Inc. plan three condominium towers near the corner of Campus Drive and Jamboree Road.
The developers plan to break ground next month on the first tower, which is the closest to Campus. They should start work on the second tower within a few months. Both towers should be 15 stories, with the first two levels above ground as parking.
The first two Opus/Geoffrey towers are set to total 202 luxury condos with a third pegged at 103 condos.
The timeline on the third tower is less certain, though Marshall said Opus could break ground by late 2005. Opus is working with Irvine on entitlement; in August the developer submitted plans to the city to nix a proposed five-story office building and put up the 15-story condo tower instead.
In November, Opus said it had reserved some 75 of the 101 condos planned for The Plaza Irvine’s first tower, at an average price of $1.2 million.
But the housing market in general has cooled in OC as a result of higher prices and anticipation of higher mortgage rates in the future, sources said.
“There’s always a risk,” Marshall said. “Fundamentally, it’s the right product in the right location, reasonably insulated in Southern California.”
Right next to the condo towers, Opus is building 341 luxury apartments. The first units should be ready by mid-2005.
There is a fair amount of competition in the area. Irvine’s Sares-Regis Group has an adjacent apartment and condominium project and Newport Beach-based The Irvine Company added units to its Villa Siena luxury apartments a stone’s throw down Jamboree.
Marshall also is eyeing a late 2005 start date for Opus Center Irvine III, a planned 13-story office high-rise. He said the developer is designing the third tower now and debating whether to build on speculation.
,Mathew Padilla
COMPANY to watch: CENTRA REALTY CORP.
Keith Ross is hoping to make big strides next year with some sizeable commercial projects.
Centra’s biggest local deal: the redevelopment of the Nabisco plant in Buena Park. Ross hopes to begin demolition work in 2005 on the existing plant and put up some 300,000 square feet of shops.
Ross and partner George Peterson run Centra from an office in Irvine at 3 Park Plaza. The company, founded in 2000, now has 21 workers.
Centra bought the iconic plant in November from Northfield, Ill.-based Kraft Foods Inc. for an undisclosed amount. The developer plans to replace the plant with a retail “power center” anchored by big-box chains, such as Best Buy or Staples, Ross said.
Buena Park is in the process of rezoning the site from manufacturing to retail and auto uses. The site is good for shopping because it’s close to the Santa Ana (I-5) Freeway, said May Hui, the city’s economic development director.
Centra has some 750,000 square feet worth of projects under development. The company is putting up 200,000 square feet of offices and shops in San Juan Capistrano and has a similar-sized project in Las Vegas near McCarran International Airport.
The developer plans to expand into Mexico in 2005. The company is eyeing two Los Cabos area deals including the acquisition of 2,000 acres with a Mexican developer.
Mexico has posed unique risks to developers in the past,potential home buyers have found it difficult or impossible to get title insurance. Ross said that’s changed, with companies such as First American Corp. now offering insurance.
In all, Ross said there’s really one challenge to growth in 2005: “To find more solid real estate investments.”
,Mathew Padilla
