Tenants Set to Rule Commercial, Housing a Bright Spot
SPECIAL REPORT
By DANIEL D. WILLIAMS
Most real estate industry players are starting out 2002 wondering whether the industry will improve in coming months.
But the question they’re afraid to ask is: will things get worse in the coming year?
As it is, real estate executives say they don’t have a good read on how 2002 might shape up yet.
“I would like to tell you we have a clearer picture, but it’s not real clear,” said Bill Halford, president of The Irvine Company Office Properties, the commercial arm of The Irvine Company. “We’re probably a quarter away from having a read on it.”
Paul Marshall, senior vice president of real estate development for Phoenix-based Opus West Corp., offers this advice: “Proceed with caution to see your way through the fog.”
Opus West has one of the few remaining office developments going up in OC. The company’s 14-story, class A tower at Opus Center Irvine is set to be completed in the third quarter. The building is about 40% pre-leased.
As 2001 closes, the commercial real estate market is marked by growing vacancies, shelved projects and financial partners with cold feet. The residential side is comparatively stronger, though cracks are evident among high-end homes and fewer escrow closings.
At least one indicator points to further slowing next year. According to Chapman University, OC building permit activity is set to drop nearly 6% next year to $3.2 billion, on the heels of 2001’s 15% plunge.
Overall, things haven’t looked this bad for the OC real estate industry since the early 1990s. But there are differences. The industry isn’t facing the extent of overbuilding it did a decade ago. And the downturn, so far, isn’t nearly as severe as it was in the early ’90s.
Back in 1990, OC’s office vacancy rate peaked at 22.2%. Today, office vacancy rates stand at 14.1%. While some parts of the county are higher, most observers contend the worst numbers are behind us.
Still, expect more fallout from the downturn next year. It’s now a tenant’s market. And with more sublease and direct space than tenants to fill it, look for more reworking of deals in 2002
“Opportunities for tenants to restructure deals on existing space will increase as landlords focus on keeping their properties occupied,” a recent Grubb & Ellis Co. report said.
“The short term oversupply of space will create more favorable lease terms for companies seeking space in the next 12 to 18 months,” said Steve Case, senior managing director for CB Richard Ellis Services Inc.
Lease rates and sale prices for OC office space will stagnate or decline, Case predicted. Sublease space stands to further flood the market, he said
But Case said he feels confident for the long term.
“While in the short-term the economy may dampen the demand for office space, the economy appears to be poised for at least a modest recovery in the second half of 2002,” he said.
One certainty is that a return to faster growth is going to be slower than first expected in early 2001. After all, many observers had predicted a turnaround by now.
Now even the most optimistic experts point to a mid-year turnaround at best. And not everyone is that confident.
Walter Hahn, a real estate consultant for Ernst & Young Real Estate Advisory Services, said he expects the market to flounder until 2003.
“The thing that drives the economy is job growth,” Hahn said. “The job growth numbers are still positive, but each month the numbers are getting less and less positive. In 2002, you may even have some months with job loss.”
For 2002, Hahn said he sees job growth at 0.5% to 2%.
OC’s housing market, with a long-running gap between supply and demand, could fare better in 2002. One exception: the priciest homes.
“Homes priced $600,000 and above have seen the sales rates drop off dramatically,” Hahn said.
Below that, Hahn and other observers say demand still is relatively strong. Overall, home prices should climb by as much as 5% in 2002, with homes at $400,000 and below going up by as much as 7%.
But there are mixed signals. OC’s median home price hit $322,000 this month, up 14.6% from a year ago. But escrow closings were off 15% in November, according to DataQuick Information Systems.
Hahn contends that OC’s residential sector will remain strong because developers are “running out of dirt.”
Activity may slow, but OC’s housing imbalance isn’t going away, said Les Whittlesey, a principal with Irvine-based land brokerage group Whittlesey Doyle.
“We will see sales rates slow, but not stop altogether,” he said. “Barring cataclysmic events, the worst is behind us.”
That goes for high-end homes, too, Whittlesey said. That segment should recover next year, he predicted.
“We’ve seen the real high-end inventory retrenching due to the dot-comers falling out,” Whittlesey said. “But by the second half of the year, the upper end of the market will firm up. The product out there will get snatched up.”
