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Year for Housing Shift? Office Resurgent

Stop us if you’ve heard this before: 2006 could be the year for a cooling in the housing market.

A lack of affordability, higher mortgage interest rates and subtle job growth have the economists at Chapman University in Orange predicting a 4.2% decrease in Orange County home prices next year.

Of course the folks at Chapman,and others, including the Business Journal,have been wrong before. Others predict more gains next year.

For 2005, Chapman projected a 7.4% drop in home prices. Instead they gained about 10%. Granted, that was less than half of 2004’s jaw-dropping 27% gain.

But the prospect of a slip in prices next year is stronger with only 11% of county residents able to afford a median priced home here. Add to that modest projected job growth of 1.7%.

Esmael Adibi, Chapman’s director of economic research, puts the probability of a 4% decrease in home prices at about 65%. Chances of a 10% decrease are about 15%, he said.

An early causality of a shifting housing market could be the subprime mortgage sector, which is heavily concentrated in OC.

Subprime lenders make loans to borrowers with imperfect credit. They charge higher interest rates and are more vulnerable to hikes by the Federal Reserve.

Rates on subprime loans now exceed 10% and are set to go higher after last week’s hike in the federal funds rate.

The sector already is contracting. The parent of Orange-based Ameriquest Mortgage Co., the largest subprime lender, plans to lay off 1,500 of its 15,000 workers, including about 325 locally.

Look for more layoffs and possibly a shakeout of smaller players next year.

The fate of subprime and other lenders could be a factor for the county’s resurgent office market next year. The worst-case scenario is mortgage companies give up 3 million square feet of office space, according to brokers.

“Even if that happens, vacancy rates might move from 7% to 8.5% or 9%,” said Kurt Strasmann, managing director for Grubb & Ellis Co. “It would still be a healthy market.”

As it is, landlords are set to raise rents next year in the 8% to 10% range.

“Rents are jumping,” said Louis Tomaselli, senior vice president of Voit Commercial Brokerage LP. “They could go up as high as 12%.”

That’s welcome news to landlords, who have raised rates in the past year but not as much as some expected.

The county has about 92 million square feet of office space. Less than 2 million square feet is set to be added next year.

“It’s very hard to find space, especially if you need more than 30,000 square feet,” said Barry Katz, CB Richard Ellis Group Inc.’s managing director for asset services.

Housing projects, including condominium towers, have been outpacing office developments by 2-to-1, Katz said.

Major office projects set for next year include The Irvine Company’s twin 14-story towers planned for the Irvine Spectrum, Maguire Properties Inc.’s 20-story tower at Park Place in Irvine and Hines Interests LP’s 260,000-square-foot office tower for 2211 Michelson Drive.

“Even with the addition of 2 million square feet in the airport area, large blocks of office space are going to be hard to come by,” Strasmann said.

Other potential builders could be put off by rising construction and labor prices. Costs went up nearly 15% in 2005 and are rising nearly 1% each month, according to Katz. In a typical year, construction costs rise about 3%.

Office developers would need to charge $3.25 per square foot to break even now. By the end of 2006, they’d have to charge $3.50.

These days, top office space can be found for less than $3 a square foot in parts of the county. The median for the airport area is $3.35.

The Irvine Co. plans to ask $3.50 per square foot at its planned Spectrum towers project.

The industrial market could see rent increases of 4% to 7% next year with few buildings going up and some older buildings giving way to housing.

Most industrial development in the past year has been small buildings for sale to business owners.


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COMPANY to watch: STANDARD PACIFIC CORP.

Irvine-based Standard Pacific Corp. could well be a barometer for the health of the country’s hottest housing markets.

The homebuilder is big in California, Florida, Arizona, Texas and, more recently, Las Vegas. Investors are showing some signs of concern: Standard Pacific’s shares are down 20% since summer, though they’re still up for the year.

The company and analysts expect another year of sales and profit gains in 2006. Others aren’t so bullish. Short sellers have been placing bets that Standard Pacific’s shares will fall further.

In an earlier interview, Chief Executive Stephen Scarborough said the company could scale back housing developments or slow down land buying if the market turns.

Las Vegas could be a test. The homebuilder got in relatively late there as part of a group that bought 2,675 acres for homes in late November. Home prices and sales continue to rise in Las Vegas, though many worry incomes haven’t kept pace.

,Mark Mueller


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PERSON TO WATCH: DOUGLAS HOLTE






Holte: goal is $1 billion in local real estate

Douglas Holte has big plans for Orange County’s office market.

Holte, senior vice president locally for Houston-based developer Hines Interests LP, hopes to oversee $1 billion in local real estate in the next three years, either by building or buying.

Hines set up shop in Irvine this year. Its OC portfolio now consists of a 1.2-acre land parcel at 2211 Michelson Drive, valued at about $12 million.

Holte plans to build a $90 million, 260,000-square-foot office tower at the site, with construction set to start in February.

The 12-story project, which doesn’t have any tenants signed on yet, should be done in spring 2007.

Holte also is looking to buy office buildings for redevelopment or renovation.

Hines has a track record. In Los Angeles and San Francisco, the company grew to $1 billion and $2 billion in a matter of a few years.

Holte tempers his ambition for OC: “Ultimately, though, our growth projections are determined by what the market requires. If it takes five years, that’s OK.”

,Mark Mueller



_________________________________________________________

COMPANY TO WATCH: STANDARD PACIFIC CORP.

Irvine-based Standard Pacific Corp. could well be a barometer for the health of the country’s hottest housing markets.

The homebuilder is big in California, Florida, Arizona, Texas and, more recently, Las Vegas. Investors are showing some signs of concern: Standard Pacific’s shares are down 20% since summer, though they’re still up for the year.

The company and analysts expect another year of sales and profit gains in 2006. Others aren’t so bullish. Short sellers have been placing bets that Standard Pacific’s shares will fall further.

In an earlier interview, Chief Executive Stephen Scarborough said the company could scale back housing developments or slow down land buying if the market turns.

Las Vegas could be a test. The homebuilder got in relatively late there as part of a group that bought 2,675 acres for homes in late November. Home prices and sales continue to rise in Las Vegas, though many worry incomes haven’t kept pace.

,Mark Mueller

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Mark Mueller
Mark Mueller
Mark is the Editor-in-Chief of the Orange County Business Journal, one of the premier regional business newspapers in the country. He’s the fifth person to hold the editor’s position in the paper’s long history. He oversees a staff of about 15 people. The OCBJ is considered a must-read for area business executives. The print edition of the paper is the primary source of local news for most of the Business Journal’s subscribers, which includes most of OC’s major corporate and community players. Mark’s been with the paper since 2005, and long served as the real estate reporter for the paper, breaking hundreds of commercial and residential real estate stories. He took on the editor’s position in 2018.
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