Real Estate: The Growth Engine Winds Down
By MATHEW PADILLA
There have been few places in the world that have experienced as much growth as Orange County in the past 25 years and almost no other place that has made so many real estate developers so widely known and ostentatiously rich.
Donald Bren made his estimated $7 billion fortune here in two decades by putting up office and industrial buildings, as well as apartments and selling land. He leads the pack of such notables as George Argyros, Donald Koll, Henry Segerstrom, William Lyon, J.M. Peters, John Lusk and Igor Olenicoff.
But the unbridled boom days are over. The lima bean and strawberry fields, the citrus groves,they are gone. Only a few open patches remain, and environmental groups and no-growth activists are fighting assiduously to protect what green space is left.
Open land to build homes has become so limited, and the job picture remains so strong, that home prices and sales keep hitting record numbers.
Today the trophy office buildings of Orange County are owned mostly by large companies, such as real estate investment trusts and big insurance companies, and by pension funds.
The commercial real estate market now is in a leasing slump. But this time around things aren’t so bad in the office leasing market, sources said, which means developers learned a lesson from the late ’80s and didn’t overbuild office high-rises in the last boom of the late ’90s.
To learn why developers exercised caution in the late ’90s, one has to go back to the 1970s, the decade of Don Koll. Or more broadly, in the ’70s, individual developers like Koll, generally men with big personalities, were able to convince banks to lend them the money to put up office towers.
These developers employed a mix of personal will and market hype to get funds for highly speculative projects.
Then came the real estate recession of the early ’80s, and banks turned off the faucet of funding for office projects. Private smaller players couldn’t get anything built. And if they could, there was not enough demand to lease them up.
Even big companies like The Irvine Company suffered in the early ’80s.
Dick Sim had a 20-year career with the Irvine Co., assisting Bren in transforming the company from a developer into an owner of income-producing properties. He said that in the ’80s recession, the firm sold a lot of land it had been leasing to building owners in order to raise funds. The sale of leased land generated millions for the company, which also sold its cable television operation. But the company never had to sell core assets, Sim said.
The boom of the late ’80s brought back some smaller players, as did the boom of the late ’90s. But each time, reflecting a maturing Orange County, less risk was acceptable to banks and investors, and so developers put up fewer speculative projects.
Larger firms that survived the capital crunch of the early ’80s and again in the ’90s have grown to dominate both commercial and residential real estate. Real estate investment trusts, such as Equity Office Properties Trust, and public homebuilders, like Irvine’s Standard Pacific Corp. and Miami’s Lennar Corp., have grown to market dominance.
Bren’s taking control of the Irvine Co. in 1983 was one of the pivotal moments in the county’s development. It gave him control of the future of Irvine, as well as large parts of surrounding cities. Bren, as a hands-on developer, has controlled the very look of much of central and southern Orange County, keeping a uniform suburban, low-rise feel,a benign attractiveness to all.
That same year, 1983, Sim said economist Al Gobar gave advice on what to build on 5,000 vacant acres that would become the Irvine Spectrum. Gobar said the Irvine Co. should cater to the county’s entrepreneurs, providing smaller spaces for them to start their companies.
The company took the advice, developing two-story buildings of 60,000 square feet or less that can be divided into smaller pieces. Some of the buildings could be divided into small offices of 500 square feet, and the Irvine Co. signed 30-day leases with those tenants, waiting to see if they would sink or swim. If they swam, well, they were welcome to lease more and more space.
By 2000, the Spectrum had 15 million square feet of office and flex space. Among the companies that started out in the Irvine Co.’s incubator space was Broadcom Corp., now a world leader in chip technology and still a Spectrum tenant.
But developers over-built low-rise space during the ’90s tech boom. Major new low-rise office campuses, like The Summit project in Aliso Viejo, did well at first but could not find new tenants in 2001 and 2002.
The Irvine Spectrum’s availability rate reached 22.5% in the second quarter of this year, according to CB Richard Ellis Inc.
The biggest name in retail development here has surely been Henry J. Segerstrom. His family began transforming lima bean fields into South Coast Plaza in 1966. Opening with a May Co. and Sears, it later became the nation’s highest-grossing shopping center. South Coast Plaza now counts more than 280 boutiques and department stores in about 2.8 million square feet of retail and dining space and draws 28 million shoppers, many of them tourists, annually.
It is part of an adult playground created by Segerstrom that includes the Orange County Performing Arts Center and the South Coast Repertoire Theater. The family still owns three trophy high-rises across from South Coast, including the county’s tallest building, Center Tower.
The home building industry has fundamentally changed over the past 25 years. It used to be that Standard Pacific Homes, as a public company, was more the exception than the norm.
In the old days, small private homebuilders, including William Lyon’s original company, would put up a few homes here and there. But in the ’90s, big public companies began buying up smaller builders to gain control of their land portfolios.
The past 25 years also has marked the development of South Orange County.
The end of an era of traditional homes on big, open green fields is coming and with it the work of developers, some still around, some gone. They include the Irvine Co., Mission Viejo Co., Lusk Co., Rancho Santa Margarita Co., Bixby Land Co. and others. These firms forged OC into a patchwork of communities.
Take Mission Viejo’s history as an example.
In 1907, Irish cattleman Richard O’Neill bought Rancho El Trabuco and Rancho Mission Viejo. Decades later, the Irishman’s grandchildren, Richard O’Neill and Alice O’Neill Avery, sold 10,000 acres to Donald Bren, Philip J. Reilly and James Toepfer. They organized the Mission Viejo Co.
The Orange County Board of Supervisors approved a masterplan for the city in 1965. A year later, families stood in line to pay $21,000 for homes on the former cattle range. Today Mission Viejo has a population of 100,000 and is almost entirely developed.
Ladera Ranch, a major master planned community of Ranch Mission Viejo LLC, opened for sale in the late ’90s and is now down to its last big village, Teramor. Anthony Moiso, who heads the development firm, is trying to develop a big swath of land that encroaches up the hills of the Cleveland National Forest. He faces some stiff resistance.
In the future, it will be harder for developers to think big. Environmental groups want to protect both the coastline and the green space in and around the Cleveland National Forest; no-growth fighters, such as a vocal group in Newport Beach, want to put a cap on traffic.
Just about the only thing left for developers to do is focus on areas of existing development, and in many cases, try to turn them around into new and better uses.
One major new housing project amid existing development is Vancouver-based Bosa Development Corp.’s plan to build twin 18-story condominium towers at Park Place in Irvine.
Condo high-rises suddenly are creating a buzz in OC’s tight real estate circle. They reflect both the tastes of aging baby boomers and the maturation of the county.
