Local Landlords Shrug Off Internet Implosion, Citing Diverse Local Economy
The dot-com shakeout on Wall Street has caused the barest quiver in the local real estate market.
Although dot-com firms have played a major role in shaping the Orange County real estate landscape, landlords say they can roll with the sector’s downturn and the diverse OC economy will keep the local market healthy.
The brutal re-evaluation by investors has seen many dot-coms’ stock prices dwindle to a small fraction of their year-ago levels, and many of these companies are no longer prime candidates to take on new space. As a result, many developers planning new projects have more conservative projections in their business plans and are more aggressive in looking for tenants outside the dot-com world.
A Grubb & Ellis survey found that in 2000 dot-com firms were involved in 16% of all real estate transactions in the Airport and South County areas. That figure continues a rising trend that has seen dot-coms’ market share rise steadily from 1.2% of all transactions in 1997 to 4.4% in 1998 and 14% in 1999.
But many landlords report a marked slowdown in dot-com leasing activity toward the end of last year and so far in January, with some believing the dot-coms’ market share has peaked, at least for the foreseeable future.
And the downsizing or threatened closing of several local dot-coms could return some space to the market. For instance:
n Webvan has laid off 115 of the 190 employees at the 100,000-square-foot former Homegrocer.com distribution facility in Irvine, but continues to lease the entire space.
–AltaVista Co. in September laid off workers at its Irvine-based Shopping.com unit.
–PrintNation.com said last month it has laid off some workers and is “re-evaluating” its 30,000 square feet of Irvine Spectrum space.
–DocPlanet.com has slashed its workforce from 85 to eight as its shares have fallen to penny-stock status, but there’s no word from the company on the fate of its Santa Ana space.
Still, a slowdown in the overall pace of construction,only partially due to the dot-com shakeout,plus strong activity from other sectors of the economy has mostly made up for the diminished leasing activity by dot-coms. The dot-com slowdown, while felt in local real estate circles, has been far from catastrophic.
“It’s not the entire high-tech area that is affected,” said Igor Olenicoff, whose Newport Beach-based Olen Properties is one of the major owners of office and industrial properties in Orange County. “I think it’s pockets of it, and so we’re not seeing any major fallout.
“We’re still staying above 96% to 97% occupancy in our entire portfolio,” Olenicoff said. “We have not seen any major fallout because of the dot-coms. We don’t see any new ones coming our way, but we’ve been fortunate that so far things have held.”
Bob Williams, a senior executive with the Irvine Co., said that OC is less reliant on dot-com firms than Los Angeles County and the Silicon Valley.
“There’s always an ebb and flow with businesses in smaller spaces,” he said. But, he added, because of the local economy’s diversity, “Orange County has not seen big hits on the slowdown like San Francisco has.”
Paul Marshall of Opus West agreed.
“Dot-coms merely added a sector to an already dynamic market place,” he said. “Without them, it’s still dynamic.”
According to Russ Parker of Parker Properties, developer of the tech-intensive Summit office campus in Aliso Viejo, the dot-coms received more attention than they deserved. They became synonymous with tech companies, he said, when in reality, “there’s more to techs than Internet or dot-coms,” Parker said. “The majority of techs are traditional brick-and-mortars.”
Jeffrey Bitetti, an executive with South Coast Metro-based Nexus Development Corp., said that while the dot-com slowdown has had an effect on the market, there have been other reasons for the slower pace recently.
“Obviously, we are experiencing a little bit of uncertainty, as is the entire county,” he said. “It’s a combination of the end of the year 2000 holidays, the presidential election snafu and the uncertainty over where the power rates are going to end up. There have just been a lot of questions and, as we experience almost every January, people are trying to forecast what will happen for the year.”
It would be a mistake for anyone to expect the dot-com slowdown to have a debilitating effect on the economy as did the defense conversion of the early 1990s, he said.
“I think we have a good and stable and diverse economy in Orange County,” Bitetti said. “We see through 2001 a robust real estate climate.”
A secondary effect of the dot-com downturn is just now making its way through the Orange County economy. Since dot-coms have been major players in absorbing new space for the past few years, their decline has meant fewer and more conservative new construction plans on the part of developers. Consequently, the strong demand and heightened bidding for developable land is tapering off, meaning that landowners have or are just now beginning to re-evaluate their asking prices.
Olenicoff is one land buyer who has firsthand knowledge of this phenomenon.
“I don’t foresee land prices and building values continuing to climb,” Olenicoff said. “Matter of fact, we were just recently presented two pieces of land where clearly the seller continues to believe the ‘greater-fool theory’ is still in effect: Namely you’re a fool to buy it, but you can find a greater fool to buy it from you and make a profit.”
As for recently completed construction projects or those just getting under way, there has been a rise in activity by legal and financial services firms that has helped blunt the effect of the dot-com slowdown.
“We’re continuing to see a very nice mix of tenants,” said Olenicoff, whose firm recently signed deals at its Brea development with Smith Barney and a division of Fujitsu.
One of the more pronounced effects of developers’ recent reliance on dot-coms to lease their new buildings has been the rush to build campus-style projects. Bitetti, whose company is building two high-rise office buildings in South Coast Metro, said the dot-com shakeout partly reaffirms his initial conviction that high-rises were not going the way of the dinosaurs.
“There was that real craze with everyone wanting campus-style developments, even though there wasn’t a large track record to support that,” he said.
Daniel D. Williams contributed to this report.
