MORTGAGE RISK
Home Borrowing Spurs Commercial Leasing; Higher Interest Rates Could Return Space
By MATHEW PADILLA
It’s a sign of the times: The fate of Orange County’s commercial developers may rest on the performance of the residential market.
People buying homes and refinancing their mortgages are fueling revenue for a host of mortgage lenders.
To keep up with demand, those lenders have leased more OC office space for their growing rosters of employees.
That’s happening at a number of subprime lenders who base their operations here. They include Irvine-based New Century Financial Corp., Orange-based Ameriquest Mortgage Co., Irvine-based BNC Mortgage Inc. and Irvine-based Option One Mortgage, a unit of H & R; Block Inc.
These mortgage lenders, which each took more space last year, have all but kept commercial real estate afloat for nearly two years.
But renting to mortgage lenders could have dangerous consequences for landlords. Signing a contract with a mortgage lender brings in revenue now, but if interest rates rise significantly, and thus kills the refinance and home buying boom, mortgage lenders may give back all the space they took.
And a massive return of office space by mortgage lenders could delay the comeback of commercial development in OC for months or even years.
Royce Sharf, senior vice president with Julien J. Studley in Irvine, said in May that mortgage companies had leased 1.5 million square feet of office space in the county in the past year.
That may not seem like much compared to OC’s total of 90 million square feet of office space.
But the county’s vacancy rate is a hefty 20%. That means about 18 million square feet already is vacant, and a major return of space by mortgage companies would have a big impact, sources said.
Mortgage companies have stabilized absorption levels in the county, according to Studley’s Sharf.
“There is an understandable concern that the current attractive interest rate environment fuels their extraordinary appetite for space,” Sharf said of mortgage companies. “The general consensus is that they will return massive quantities of office space back to the market” when interest rates reverse course and spike higher.
In the John Wayne Airport area, Royce said ample sublease space already is competing with direct space.
Even so, it can be competitive among landlords to attract a mortgage lender.
Trammell Crow Co. invested months trying to get the parent of Ditech Funding Corp. to move to Arena Corporate Center,Trammell’s large speculative project in Anaheim.
GMAC Mortgage Corp., Ditech’s parent, was considering taking 180,000 square feet of space to give Ditech room to grow but changed its mind earlier this year.
Ditech will stay in Costa Mesa. Trammell Crow is left with 254,250 square feet of vacant space at the trophy low-rise office complex near the Arrowhead Pond.
But Trammell vice president John Harty said he’s close to signing a professional services company for 50,000 square feet. He also is in talks with banking, insurance and healthcare companies.
Perhaps the most rapidly expanding mortgage lenders have been subprime lenders, who make loans to people with less-than-perfect credit.
Subprime lenders such as New Century and Option One have seen revenue and profit rise sharply in the past few years. New Century posted a 52% gain in net income to $45.7 million in the March quarter, versus a year earlier, on a 61% gain in revenue to $181 million.
And they’ve expanded their local operations to make room for the growth.
Last year Option One leased 246,324 square feet in Irvine. New Century took 62,850 square feet, also in Irvine.
And it doesn’t stop there. Ameriquest took 138,600 square feet in Orange and BNC Mortgage Inc. leased 63,000 square feet in Irvine.
But nearly everyone in commercial real estate, including the mortgage companies themselves, know things can’t remain this good forever.
“I don’t think you can double every six months,” said Brad Morrice, president of New Century. “That’s probably not sustainable in the long run.”
Still, few predict near-term doom and gloom for mortgage lenders.
Doomsdayers need to keep in mind that interest rates are at historic lows, according to James Camp, senior vice president with the Newport Beach office of Voit Development Co.
“Americans borrow a lot of money,” Camp said. “And whether they pay 5% or 6% will not make a big difference.”
Camp said one factor that could delay a comeback in speculative development is shadow space. Shadow space is the excess office space a company has but does not sublease. When the economy improves, many companies will expand into their shadow space before leasing more space.
“So you will see job growth, but that doesn’t necessarily translate into more space,” Camp said.
