Interest Rates, Economy to Set Pace for Commercial, Housing
By DANIEL D. WILLIAMS
Orange County real estate enters 2003 with two burning questions: will the hot housing market succumb to an inevitable slowdown, and will the beaten-down commercial sector get back on its feet?
As for housing, runaway prices could come down by 5% to 10% next year,the first drop in five years,according to Anil Puri, dean of California State University, Fullerton’s College of Business and Economics.
A rise in interest rates, which is expected next year, could put a damper on things. OC’s chronic imbalance between supply and demand isn’t likely to go away, but a cooling isn’t all bad, economists say. At the current rate, rising home prices could make it harder to recruit workers to OC.
For commercial real estate, the outlook is more static: leasing is likely to stay sluggish, development should be stagnant and investment sales likely will keep pace.
“It should be a banner year for investment sales,” said John McDermott, regional manager for Irvine-based brokerage Sperry Van Ness. “I believe we will see records set next year in both dollar volume and number of transactions.”
Even with a possible rise in interest rates, industry sources point to ideal conditions for real estate investments next year.
“There’s no other time when the stars will be so aligned,” McDermott said.
Low interest rates, off-peak real estate prices and a shaky stock market stand to drive deals, he said.
Look for one tweak: professional investors could end up selling OC properties next year and take their money to Phoenix, Tucson, Denver and other Western states suffering from overdevelopment.
Still, sources say there are plenty of investors waiting to buy property here.
“A 100-unit apartment complex on the block receives 20 offers,” McDermott said.
But even OC’s investment market isn’t foolproof. For the first time in six months, brokers say they are placing ads for properties for sale, meaning the buying clamor has tempered. Higher interest rates also could be a variable.
The office market likely will keep lagging other sectors, including retail, industrial and residential. Class A,the newest, best office space,should bear most of the brunt again next year. Class A vacancy rates now stand at 20% and could climb slightly in the coming year.
Leasing will remain a problem in 2003.
The market’s return will be slow, if at all, according to Bill Halford, president of The Irvine Company’s commercial arm.
“The economy drives our industry, and I don’t expect it to make a 180-degree turn and skyrocket next year,” he said.
But the market may be one in which the pieces of the pie are smaller and the rich get richer.
The Irvine Co. gained 1.2 million square feet of office leases during the second and third quarters. The company accounted for 690,000 square feet of net absorption, or virtually all of the county’s total for the period.
“During a time of no job growth, companies play a game of musical chairs,” Halford said. “And you hope when the music stops, you have more of the new business.”
One thing the real estate community is hanging its hat on: while activity may be down in OC, it’s even worse elsewhere.
“We’re one of the two to three strongest economies in the country,” Halford said.
PERSON to watch: MIKE HARRAH
Mike Harrah flies under the radar,literally. The reclusive developer with the ZZ Top beard piloted the helicopter stunts for the recent “Austin Powers” movie. 2003 should see Harrah take center stage, without his crash helmet.
For years, Harrah has talked of a 37-story office tower,OC’s largest,in downtown Santa Ana. The proposal has drawn snickers from skeptics, but now the wheels are in motion on the project and work could begin as early as next year.
Harrah, who has almost single-handedly redeveloped Santa Ana, operates his real estate holdings through Caribou Industries Inc., a construction and property management company based on Main Street.
In the mid-1990s, Harrah bought into Santa Ana’s depressed downtown, fixed up landmarks and locked government entities and others into long-term leases. He owns more than 2 million square feet of office space in Santa Ana.
For the propos-ed One Broadway Plaza, Harrah en-visions a five-star French restaurant on the top floor and Fortune 500 companies and law firms below.
,Daniel D. Williams
COMPANY to watch: Standard Pacific
Irvine-based Standard Pacific Corp. became Orange County’s top homebuilder this year but faces the prospect of a changing tide in 2003.
As OC’s largest publicly traded homebuilder, Stan-dard Pacific could be the harbinger for a potential shift in the hot housing market, if interest rates rise and sales cool.
Another take: Standard Pacific could be among the winners as homebuilders go from shooting fish in a barrel to competing for buyers in a slower market.
This year, Standard Pacific has held about 12% of OC’s housing market, according to San Diego-based Market-Point Realty Advisors. Sales at big South County projects including San Clemente’s Talega and Ladera Ranch drove Standard Pacific’s gains.
The company is going into 2003 with new leadership. Todd J. Palmaer, former president of the homebuilder’s San Diego arm, is the new president of Standard Pacific’s OC division. Palmaer grew the San Diego market by adding more affordable homes to the mix. He’s expected to bring the same aggressive attitude to OC homebuilding.
,Daniel D. Williams
