If a rising tide lifts all boats, what happens when that tide gets a little rocky?
Orange County was awash with investor money for the past few years as a good economy, low unemployment and a soaring housing market helped flood area businesses with money.
But then the collapse of the subprime loan market made waves in more than just the financial sector.
New office buildings have been left empty, mortgage brokers found themselves without jobs and some investors have gone looking for new places to put their money.
“What is happening is probably a good correction in the capital markets,” said Michael Gottlieb, chairman of Citation Capital in Costa Mesa. “Lenders got way too aggressive.”
Aggressive lenders and investors helped bring on the collapse of not only mortgage companies handling riskier loans,including Irvine’s New Century Financial Corp. and Orange’s ACC Capital Holdings Corp.,but also caused local home service-oriented businesses to pare their operations.
“OC has had a large presence of subprime lenders and people who service subprime,the title companies, the escrow companies, the residential mortgage brokers,” Gottlieb said. “That industry is just devastated right now.”
Growing Investment
But financiers don’t see investors running away from OC because it was the epicenter of the subprime quake.
“I keep expecting there to be problems with subprime being based here, but there hasn’t been,” said Jim Axelson, first vice president of investments for Merrill Lynch & Co. in Laguna Hills. “There is no dry up in capital at all. That’s a big myth. I don’t see any slowdown, if anything I see a speeding up (of investment).”
Venture capital continues to target OC, with 20 deals in the first half of the year, according to a report from Dow Jones VentureOne and Ernst & Young LLP. Fourteen of those deals happened in the second quarter alone (third-quarter numbers are due out Oct. 22) with the majority targeting medical device makers and drug makers.
That’s in line with the national trend. The average quarterly level of biotech investment jumped to nearly $1.5 billion this year, compared with a $1.1 billion quarterly average the previous two years, according to VentureOne.
“For more than two years, we’ve seen steady growth in the amount of venture capital invested and the promising liquidity markets,on the public exchanges for technology companies and primarily in mergers and acquisitions for healthcare companies,look to be driving investor optimism,” said Jessica Canning, director of global research at VentureOne.
“Healthcare continues to attract nearly one-third of all venture capital dollars and medical device companies, interestingly, are converging with biopharmaceuticals as a major draw for investors,” she added.
OC device makers drew in nearly $250 million for the first half of 2007, according to the report. Local drug makers took in $39 million.
More established businesses continue to draw investor money as well. According to a recent report from BizBen.com, sales of local businesses last month more than doubled the previous year’s total to 248.
Last week, Oracle Corp. said it bought Irvine-based LogicalApps Inc. for an undisclosed amount, in a recent example of deals still happening here.
Individual Investor
But the individual investor, who was a major driver of real estate growth through home buying and tenant-in-common transactions, is holding his or her money a little closer to the vest, according to Axelson.
Axelson, who works with private investors on their personal financial planning, said his clients are targeting safe places to put their money.
“We are going to the highest quality assets that we can find,” Axelson said. “Triple A tax-free municipal bonds are becoming popular again.”
Axelson said those steady returns, which come in around 5%, lost favor with investors who flocked to real estate or emerging markets the past seven years.
The Washington, D.C.-based National Association of Real Estate Investment Trusts, known as NAREIT, reported a much higher return than bonds last year with its index of real estate investment trusts seeing a 34.4% gain.
And emerging markets,China in particular,has been among investors’ favorites in the past few years posting a 54.2% return during the past 12 months, according to the Hong Kong Stock Exchange index. Both of those outshined the Standard & Poor’s 500 index at 16.5% for the 12 months ended Sept. 30.
Gottlieb said REITs aren’t “sexy” right now for Wall Street investors, which resulted in a negative return of 6.7% this year through Sept. 30, according to NAREIT.
“For a while people didn’t perceive a lot of risks in real estate,” Axelson said. “Now they see that so they are going to high-quality assets.”
Many of the pension funds and other equity investors who allocated more funds for real estate investing are sitting on the sidelines looking for bargains, Gottlieb said. Others, such as the big private equity plays that dominated the past few years, are getting out of real estate completely.
“I personally never invested in mortgage-backed areas. We stayed clear of that for a while,” Axelson said. “We seemed not very savvy for a lot of years, but most people we are dealing with aren’t interested in taking a lot of risk.”
Are there any investors out there willing to take the risk?
“For trophy properties and quality real estate, there will always be a buyer,” Gottlieb said. “Because of the devaluation of the dollar, we have to compete with foreign investors and our dollar isn’t worth as much as say the euro is so that makes us less competitive.”
But even with foreign investors, Gottlieb sees money moving out of real estate and into more stable investments.
“We are seeing a reversal of the huge excess supplies of cash that were readily available to real estate,” he said. “Investors and advisers are definitely more cautious. It is all about risk and reward.”
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OC Economy Falls to 49th
Orange County’s economy fell to 49th among the nation’s 200 largest metropolitan areas. This is a 32-spot drop from its ranking in 2005 where OC held the No. 17 spot, according to a study by the Milken Institute and Greenstreet Partners. The study measures job, wage, salary and technology growth and its ability to both create and sustain those jobs.
Other OC rankings:
– No. 1: Number of highly concentrated high-tech industries
– No. 45: 5-year wages and salaries growth
– No. 49: 1-year wages and salaries growth
– No. 59: 5-year job growth
– No. 81: 1-year tech gross domestic product growth
– No. 87: 1-year job growth
– No. 117: 5-year tech gross domestic product growth
– No. 127: Overall job growth
