Things haven’t been this good for the Orange County real estate industry since the late 1980s.
Building permit activity is projected to hit $4.2 billion in 2001, up from $4 billion this year and eclipsing 1988’s record, according to Chapman University.
But unlike the go-go 1980s, developers and industry observers say things are different this time around.
“We had severely overbuilt,” in the 1980s, said Richard Sim, chairman of the Irvine Company’s investment property group. “Now we build based on demand levels. The products are in balance. If we don’t rent, we’ll slow down building.”
After years of economic boom, most analysts predict the U.S. economy to slow in the coming year. Even so, economists predict continued growth for Orange County’s real estate market, albeit at a slower pace than seen in the frenetic past few years. Developers say that should bear out, barring unforeseen circumstances.
“For 2001, the Orange County real estate market will continue to have the equilibrium experienced in 2000,” said Steve Layton, a principal of Newport Beach-based Layton-Belling & Associates. “There are caveats. First, is if the dot-com and tech sectors go into a major correction, and second, is if the general slowing in the economy continues, we could face increased vacancies.”
One negative trend already is playing out in the local commercial real estate market. With national theater chains lining up to file for bankruptcy, brokers are finding it increasingly difficult to lease available space in shopping centers connected to movie theaters, according to Todd Goodman, who specializes in leasing retail space for CB Richard Ellis.
Still, the Chapman study and comments by local experts point to a bullish real estate market in 2001. Orange County’s diverse labor market,a balanced mix of old economy and new economy companies,is a strength.
“We’re so diverse,” Sim said. “There’s not just one or two industry clusters. We have computers, hardware, autos, telecom, banks, insurance. With all these clusters, even if one is soft, the overall economy can continue to thrive.”
With limited land and increasing lease rates, Gregg Haly, a senior vice president at CB Richard Ellis, said he sees more conversion of existing industrial space into two- to three-story, low-rise office buildings. Those types of buildings are a lure for tech companies and offer higher rents than industrial facilities, according to Haly.
Esmael Adibi, Director of the Anderson Center for Economic Research at Chapman University, said increased building activity translates to employment growth in the construction industry. In 2000, Orange County saw an increase of 6,000 new construction-related jobs. The rate of increase will slow in 2001, according to Chapman. Yet, Orange County is projected to add 4,500 jobs,without the benefit of Disney’s nearly completed California Adventure theme park.
The county’s overall job growth is helping to keep the housing market hot.
“The increase in new jobs is a good indicator of the strength of the price of homes,” Adibi said.
Though lower than the double-digit highs of 1998 and 1999,and, down from the 9% appreciation of 2000,housing prices could appreciate 7.7% in 2001, Adibi said.
The confluence of housing appreciation, new jobs and, a projected 7.8% increase in median family income makes the residential real estate market attractive to both buyers and sellers. Buyers, though, appear to have the edge. The Federal Reserve is expected to lower interest rates in the second half of the year. With mortgage rates lower and family incomes higher, Chapman predicts the housing affordability index to zoom from 87.5 in the third quarter this year to 97.7 by fourth quarter 2001.
“With the lack of residential lots keeping supply tight and demand growing rapidly as a result of strong job formation and wealth creation, the county’s unsold housing inventory remains at historic lows,” according to Chapman. The model forecasts three months’ inventory of unsold homes. Compare that number to the 25 months of inventory on hand in 1995.
John Burns, senior managing director of The Meyers Group, said two interesting trends are emerging in the residential market. Keep a close eye on the high-end residential market, he said. Crystal Cove and Shady Canyon are two new developments in South County with lots carrying $1 million-plus price tags. Their salability, according to Burns, could speak volumes about the health of the market.
The other residential trend comes from an unusual locale: North County. With limited space remaining and sky-high prices in South Orange County, developers have begun looking north, to Fullerton, Yorba Linda and Brea, where 1,000-plus, new-home, masterplanned communities are in various stages of development. n
