Call it office flipping.
Selling a house six months after buying it has been profitable for speculators here in the past few years. The trend may be spilling over into the commercial market.
Newport Beach-based KBS Realty Advisors LLC said it’s marketing for sale twin high-rises in Newport Beach after buying them with a Michigan-based pension fund partner about six months ago.
Newport Beach-based chipmaker Conexant Systems Inc. sold the headquarters to the partners for $110 million, or about $295 per square foot, in March. The 10-story towers total 370,000 square feet.
The buildings, which also house the headquarters for Conexant spinoff Mindspeed Technologies Inc., could sell this time for as much as $140 million, or $375 per square foot, according to industry newsletter Real Estate Alert.
It’s rare to see an office building change hands in such a short period, according to George Economos, who brokers sales of commercial buildings for NAI Capital Commercial Real Estate Services in Newport Beach.
Economos said in a normal market an investor typically must hold an office building for at least three years to turn a profit. A commercial buyer incurs costs such as title fees, lending fees and interest, broker commissions and building refurbishments, he said.
Today’s market is far from normal, he said.
As with the housing market, commercial buyers are finding cash plentiful amid relatively low interest rates, Economos said. With yields low on many stocks and bonds, investors are willing to accept lower returns on commercial buildings, which inversely raises prices, he said.
“We have been in very few markets where you can exit in a year and have a profit,” Economos said. “This really is an historical time. I think (the market) is rising even faster than in the very late 1980s.”
The median price of class A office buildings around John Wayne Airport reached $267 per square foot in the first half of this year, a 50% jump from late 2003, according to Jerry Holdner, vice president of market research with Voit Commercial Brokerage LP.
He said one top tier building, 100 Bayview in Newport Beach, was bought in the second half of this year for a price of $369 per square foot,the highest price since Washington Mutual Inc.’s campus sold for $373 in fall. Bayview sold in summer, about two years after it previously traded hands.
Brokers said commercial flipping is unlikely to catch on.
For one thing, many of OC’s premium buildings are in the hands of two landlords that tend to hold for the long-term: Newport Beach’s The Irvine Company and Equity Office Properties Trust of Chicago.
KBS’ partner in the acquisition, the State of Michigan Retirement Systems, originally planned to hold 4000 MacArthur Blvd. for years, according to Steve Jarecki, a senior vice president with KBS.
The pension fund took another look at its entire portfolio of real estate and other investments and decided to sell the high-rises in Newport Beach, he said.
“We consider the location as second to none,” Jarecki said.
Kevin Shannon, a broker with Grubb & Ellis Co. in Torrance, is marketing the buildings for sale. He said the $110 million paid by KBS and the pension fund was negotiated in fall.
The location on MacArthur Boulevard is the best thing going for the buildings, said Jay Carnahan, a principal with Newport Beach commercial brokerage Orion Property Partners.
Investors are paying higher prices with the expectation that office rents are set to rise significantly, Carnahan said.
Lease rates could move higher since office vacancy levels have fallen and there is limited new construction, he said. There are a handful of new office buildings planned in the Irvine-Newport Beach area, but they could take 18 months or more to build.
Interest Rate Risk
The big risk could come from higher interest rates, Carnahan said.
He and other brokers said mortgage and other real estate companies lease millions of square feet in the county. They could flood the market with space if there is a dramatic shift in mortgage rates.
The Conexant sale earlier this year involved a couple of parties. The towers previously were owned by Deutsche Bank AG. Conexant leased the buildings from the bank in a special arrangement.
Under the agreement, Conexant had the right to any increase in value of the buildings, according to a Conexant spokeswoman. Conexant got a tax break from the deal, the spokeswoman said.
When the deal with Deutsche Bank expired, Conexant exercised its right to buy the buildings from the bank and immediately sell them to KBS Realty and the State of Michigan Retirement Systems.
