It’s often said that the commercial real estate market trails the housing market by about a year, in good times and bad.
If that’s the case, Orange County-based office, industrial and retail developers and investors could be in for a long and painful 2009.
Most homebuilders aren’t expecting a meaningful turnaround in their industry until the latter part of next year, meaning it might not be until the end of 2010 before the commercial real estate market begins showing real signs of improvement.
Next year “will be very difficult. I don’t think we’re going to bottom out in 2009,” said Terry Thompson, vice president of acquisitions for Newport Beach-based WCB Properties.
Thompson, who this year has also served as president of the Southern California chapter of the National Association of Industrial and Office Properties, said that OC tends to bounce back faster than other regions. Still, he isn’t alone thinking that things are going to be tough next year, locally and nationally.
A recent report by the Urban Land Institute and PricewaterhouseCoopers predicted that “U.S. commercial real estate faces its worst year since the wrenching 1991-92 industry depression.”
The report projects losses of 15% to 20% in real estate values from the mid-2007 peak.
Statewide, Los Angeles remains a relatively strong market, but OC is likely to suffer along with the Inland Empire, the report said.
The upside of that bleak assessment: deals for opportunistic investors.
The early 90s were when WCB partners “made a lot of money the last time around, working with opportunity funds,” Thompson said.
This time around “there’s going to be opportunity (for big gains) between now and when things are bottoming out,” as well, he said.
Buying Distressed Loans
For investors, the deals of choice in 2009 likely are to be for distressed loans. Discounted loans on OC buildings bought at the peak of the market are expected to be put up for sale by lenders, which could prove to be a big buying opportunity, market watchers say.
One Central County office formerly owned by Maguire Properties Inc. already traded hands thanks to a discounted loan. Similar deals are expected going forward.
Leasing activity is expected to pick up before sales do, as it will take a while for commercial property values in OC to come back up.
Office vacancy rates now run at about 16% for the county’s inventory of about 105 million square feet, an increase of nearly 50% from a year ago.
Likewise, vacancy rates for the area’s 245 million square feet of industrial buildings, which have held up much better than offices, have still increased some 15% year-over-year, to about 4.5%.
Kurt Strasmann, managing director of OC brokerage operations for Santa Ana-based Grubb & Ellis Co., said last month he expects the county’s office market to bottom out at about 20% vacancy in a year and that 2009 will be another year of negative absorption of about 1.5 million square feet.
Strasmann predicts that a year from now, effective lease rates in the county’s offices will be 10% to 15% below where they are now, while leasing activity will continue to be flat. In the industrial sector, rental rates should drop as much as 5% in the next year, he said.
“Based on current economic trends and uncertainty in the financial system, the Orange County market will take at least 12 to 18 months to start to show signs of a meaningful and lasting turnaround,” Grubb & Ellis projects.
Staffing Up
Assuming a slow amount of buying activity and leasing, some local brokerages and developers and bracing for layoffs during the next year. Other related businesses could see an upswing in employment though.
Along with buying discounted loans, the PricewaterhouseCoopers/ULI report suggests that companies should retrench on development and instead staff up asset managers, leasing pros and workout specialists.
“When things don’t go right, people try to get smarter about keeping tenants and increasing cash flow,” said John Combs, principal of Santa Ana-based RiverRock Real Estate Group Inc.
RiverRock, a commercial real estate management and leasing company, recently added a new line of business that does consulting for distressed assets. There’s plenty of work available these days for
stabilizing and turning around troubled assets, he said.
“I’m the happiest person in real estate,” Combs said.
