WHEELIN’ & DEALIN’
Brokers Post 11% Gain in Deal Volume as Interest Rates Drive Sales
By MATHEW PADILLA
Orange County’s commercial brokers are an adaptable lot.
When office leasing is down, they switch hats and do investments. Property too big? No problem. They sell small industrial buildings as if they were new homes.
It’s that kind of flexibility that enabled OC’s brokers to increase total transaction volume 11% in 2002 from the prior year, according to the Business Journal’s list of top OC brokers.
Volume at the 25 largest brokerage offices rose to $9.7 billion in 2002 from $8.7 billion a year earlier.
It’s a shocker at first that transaction volume rose by $1 billion during a recession, but not to industry insiders.
Brokers say that investment buys and purchases by users are driving the commercial market and creating a lot of demand.
As poor stock performance continues, investors keep searching for real estate deals, and small businesses take advantage of historically low interest rates to buy an industrial or office property to house their businesses.
It’s largely because various broker sales groups are centralized in the Newport Beach office of CB Richard Ellis Inc. that the office is No. 1 on the Business Journal’s list again this year, according to Steven Case, CB’s senior managing director and top executive in OC.
CB’s Newport Beach office did $1.3 billion in sale and lease deals last year. The majority of transactions for CB’s Newport Beach office are in industrial sales and leases, something true for most brokers on the list.
In fact, industrial deals propelled two offices of Voit Commercial Brokerage up the list.
Voit’s Orange office jumped three spots to No. 2 on the list with $724 million in sales and leases, a 26% increase vs. a year earlier. And its Irvine office also moved up three places to No. 3, with a 33% gain to $708 million in transactions.
The industry breakdown for the Orange office of Voit was 84% industrial, 13% office and 3% retail.
John Owen, a managing partner with Voit, said his office did a number of industrial infill sales in North County. A big infill project under way: Voit Brea Business Park.
The ongoing project is set for 16 buildings totaling 510,000 square feet. Last year, Voit closed five deals at the infill project and five more buildings are in escrow.
The buildings range from 9,500 to 52,000 square feet, with most sales being in the range of 13,000 to 27,000 square feet. Prices are from $87 to $95 per square foot.
The sale of small industrial buildings, generally anything under 40,000 square feet, has been hot across the county because of low interest rates.
But Owen said there’s also been strong demand to lease 1,500 to 10,000 square feet in multi-tenant industrial buildings. He said OC sports a diversified economy that continues to generate smaller, entrepreneurial firms.
A big chunk of the investor funds pie was served to retail property sellers.
Irvine-based Faris Lee Investments, which does only retail, catapulted to No. 4 on the list, up from No. 20 a year earlier.
The retail focus of its 12-broker office worked well last year. Faris Lee closed $600 million worth of deals, up 232% from a year ago.
Among its top deals was the sale of Torrance Crossroads, a 492,233-square-foot retail center in Torrance. Tenants include Vons, Office Depot and Home Depot. The project was split into pieces and sold off to six buyers for $138 million.
Rich Walter, president of Faris Lee, said that on several occasions his company has taken a retail project, divided it into parcels, and sold each piece separately. One example was Birch Street Promenade in Brea. Faris Lee used a break-up strategy to broker a $27.2 million sale.
Two other brokerages on the list derive most of their business from retail: the Irvine office of No. 9 Marcus & Millichap Real Estate Investment Brokerage Co. and the Irvine office of No. 12 Sperry Van Ness.
Reza Etedali is the top retail broker in the Sperry office; he did $150 million in deals last year and has done $275 million worth of transactions in the first quarter this year.
“We are in an amazing market,” Etedali said.
He said the combination of low interest rates and tax-deferred strategies are driving retail sales.
Private investors, using the tax-deferred advantage of a so-called “1031 exchange,” now make up 80% of activity, according to Etedali. He said last year the percentage was closer to 50% of the market and in the late 1990s was more like 30%.
The questions on brokers’ minds these days is how long the hot sales market will last and when office leasing will pick up.
Brokers say the two may switch places simultaneously. That’s because while office leasing should pick up in tandem with the economy, an improvement in the economy will lead to an interest rate increase. That will kill demand for small industrial properties.
OC’s office vacancy rate increased in the first quarter to 16.4%, the third consecutive quarterly rise, according to CB Richard Ellis.
Average asking lease rates fell, down to $2.01 per square foot, from $2.04 at the end of last year and $2.10 for the same period last year.
Several brokers said they expect office rental rates to continue to decline into next year, but that vacancies would likely flatten out.
Vacancies in the John Wayne Airport area hit 18.1% in the first quarter, up from 16.7% a year ago. In South County, the vacancy rate improved to 18.3%, vs. 19.9% for the same period last year.
Still, some brokers are cautiously optimistic about the John Wayne Airport area and class A office space in general.
Companies are starting to come back to high-rise office space, according to Brian Childs, executive vice president with the Newport Beach office of No. 21 NAI Capital Commercial Real Estate Services, which reported $186 million in transactions, up 107% from 2001.
But Childs, like many other brokers, is concerned that mortgage companies are leasing too much space countywide.
When interests rates rise, those mortgage companies could reduce staff or, in the case of smaller companies, fold entirely.
Either way they could flood the market with commercial space.
