Orange County’s real estate players are trying to figure out how to turn pain into profit in 2009 as foreclosures and distressed properties present opportunities.
Just how painful things are going to get before the market turns around is the biggest question the industry will face next year.
“Hopefully 2009 is not going to be the bloodbath that we saw in 2008,” said Jeff Moore, senior managing director of Orange County operations for CB Richard Ellis Group Inc.
Brokerages here were hit by a roughly 70% decline in sales volumes last year, along with continued sluggish leasing, especially in the office market. Those trends are likely to continue for the time being.
A lot of commercial real estate businesses “will have to tape up and play hurt,” said Joe Vargas, executive managing director and area manager for Cushman & Wakefield Inc.’s Southern California operations.
On prices, there are signs that the commercial real estate market is due for a big correction next year, said Robert Brunswick, chief executive of Newport Beach-based real estate investment bank Buchanan Street Partners.
“Most lenders didn’t take their losses last year. In 2009, we’re going to pay for the loose underwriting (of the past few years). All those loans are coming due,” Brunswick said.
Falling Prices
Prices for commercial buildings and land here could see a drop of 15% to 30% once all is said and done, Brunswick said.
On the upside, “we’re seeing investment opportunities we’ve never seen before,” Brunswick said.
Forced sales, distressed property sales and acquisitions of distressed loans are being eyed by Buchanan Street, company officials said.
Office tenants are also in line to move up in this market.
Office rents are expected to decline another 10% or so in 2009, after about a 15% drop in effective rents this year, market watchers said.
“I’m seeing concessions I’ve never seen” in more than 15 years here, said Jeff Manley, managing principal of Newport Beach-based tenant brokerage Cresa Partners.
Tenant improvement concessions for high-end leases, normally in the $30 to $40
per square foot range, are double that today, Manley said. He predicts rents in OC will
continue to fall for the next six to nine months.
Givebacks of large blocks of office space by the area’s financial sector are still expected in 2009, with property used by Downey Financial Corp. and Washington Mutual Inc. likely sources of downsizing.
Filling Buildings
Filling up empty buildings is the main goal in 2009, not construction.
“I can assure you that development’s not coming back in 2009,” said Kurt Strasmann, regional managing director of OC brokerage operations for Santa Ana-based Grubb & Ellis Co.
Non-residential construction should decline by more than 8% from 2008 levels next year, following an even more drastic 24% decline from 2007 to 2008, according to data released last week by Chapman University economists.
Chapman is predicting the value of residential construction to increase about 3% from 2008 levels next year, after a 35% decline in the prior year’s period.
COMPANY TO WATCH: GRUBB & ELLIS
As much as any local company, the 2009 performance of Santa Ana-based Grubb & Ellis Co. could be a gauge of the commercial real estate market next year.
The real estate investor and brokerage is hoping for a better year than 2008, which saw a drop in business from 2007, higher-than-expected losses and plenty of boardroom drama.
As a result, the company’s stock,like most brokerages’,has been hammered in the past year, falling some 80% to a recent market value of about $80 million.
The stock could see a rebound as the dust settles on the boardroom fight going into 2009.
Grubb earlier this month fended off a proxy fight from former chairman Tony Thompson,the company’s second-largest shareholder,when his second attempt to rejoin the company’s board this year was denied.
There’s still an expectation that Thompson will press to get Grubb to consider taking on some of his recommended strategies for dealing with the down commercial real estate market. Thompson also is running his latest real estate company, Irvine-based investor Thompson National Properties.
One thing seems certain next year: Grubb should find itself a new, full-time chief executive. The company’s been without a permanent replacement for former chief executive Scott Peters since July, with the role being filled on an interim basis by former Irvine Company executive Gary Hunt.
After a year that saw real estate sales nosedive some 70% from their peak amid the credit crunch, as well as a slower pace of office, retail and industrial leases, Grubb,OC’s second-largest commercial brokerage based on transactions,and others will be hoping for signs of an industry turnaround.
There could be a big source of new business in 2009. Robert Bach, Grubb’s chief economist, last month said that the industry could see nearly a 15% increase in transactions next year, driven largely by the sales of distressed real estate.
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Mark Mueller
PERSON TO WATCH: IGOR OLENICOFF
Next year’s likely to see a number of cash-flush investors make plays for some of the area’s more prominent distressed commercial real estate. We’re guessing that Igor Olenicoff is one of them.
Olenicoff, founder of Newport Beach’s Olen Properties Corp., largely has been quiet in terms of buying and building in the past few years. His last big acquisition here came in 2005, when he bought the Main Street Towers in Irvine.
That could change in 2009. Sources say that Olenicoff,who the Bus-iness Journal estimates to be worth about $1.5 billion,could be readying his company to go on a buying binge, targeting potential distressed properties here and elsewhere.
Olen was said to be one of the leading bidders on the Newport Beach headquarters of bankrupt Downey Financial Corp. before the property was taken off the market a few months ago.
Regardless of how much new property Olen takes on in 2009, the company will likely find itself with a higher profile among area landlords as others pare down. Following the expected completion of OC sales by Maguire Properties Inc., Olen might find itself as the county’s second-largest office landlord behind Irvine Company.
Most of Olen’s growth efforts of late have taken place in Brea, where the Olen Pointe office development is now adding the largest apartment complex the city’s seen in nearly a decade.
In Irvine, the company’s also building a new restaurant next to its Main Street towers. It will be named after Olenicoff’s late son, Andrei.
Olenicoff, who last year wrapped up a long-running tax dispute with the federal government, also is likely to stay in the news next year for a related matter. He has a $500 million lawsuit under way against UBS AG.
Mark Mueller
