For the first eight months of the year, office property sales in Orange County made up nearly 30% of all the large office buildings that sold between Seattle and San Diego, according to Kevin Shannon, vice chairman in the institutional investment group of Los Angeles-based CB Richard Ellis Group Inc.
In a normal market, OC sales should make up less than 10% of West Coast sales, according to Shannon, one of the region’s top brokers of large office properties.
In terms of total deals, though, the number of sales for OC offices is down from the rapid turnover seen at the peak of the market.
There were 11 sales of OC offices 25,000 square feet or larger completed in the third quarter, compared to 29 a year earlier and 37 in the third quarter of 2007, according to Newport Beach-based Voit Real Estate Services.
That’s still well above the amount seen in other local markets and is driven in large part by what local real estate officials call the “Maguire Effect.”
Los Angeles-based Maguire Properties Inc. amassed an OC portfolio through a $2.9 billion portfolio acquisition in mid-2007, as well as through other acquisitions and new developments. But the rough economy for real estate prompted the landlord to unload a number of those buildings at fractions of their previous values.
Most prominently, Emmes Group of Cos. bought Irvine’s 3161 Michelson tower in June for $160 million, about 40% less than what Maguire paid to build the 19-story tower. The building since has been re-named The Michelson.
Maguire wasn’t the only building owner to sell out because of financial troubles.
OC saw the first big office building in the country trade hands at the behest of the Fed-eral Deposit Insurance Corp. with the former Newport Beach headquarters of failed savings and loan operator Downey Financial Corp.
The next big sale expected to close is for an Irvine office tower built in 2007 by bankrupt developer Opus West Corp. of Phoenix.
Newport Beach-based Greenlaw Partners and Westbrook Partners of San Francisco are expected to close on the property in a few weeks, for about $56 million. The building had more than $80 million in debt tied to it as of July.
Among other building types, Costa Mesa’s South Coast Home Furnishings Centre was sold to Newport Beach-based Burnham USA Equities Inc. in February for about $35 million after the mall’s previous owner defaulted on an $84 million loan.
Expect more distressed sales by midyear next year, according to Shannon and CB Richard Ellis’ Phil Voorhees, senior vice president for the company’s national retail investment group.
The two are heading up a new group for the brokerage that will be focusing on sales of distressed office and retail buildings on the West Coast that are tied to commercial mortgage-backed securities bonds.
Voorhees said he sees a need for experienced brokers to handle these distressed buildings since a number of commercial mortgage-backed securities properties have gone into default already, but aren’t on the market yet.
“The best word to describe the situation is ‘limbo,’” Voorhees said.
There are three big retail properties in Southern California valued at more than $100 million nearing “imminent default,” according to Voorhees. Another six or so local retail properties in the $30 million to $50 million range are in the same boat, he said.
Among retail properties, the lack of sales has made it hard for property owners, banks and other lenders to best figure out the real value of their buildings.
There’s been more activity on the office side of the market, and recent deals suggest pricing might be showing signs of stabilizing, according to Shannon. There appears to be more capital in the market as of late, which in some cases is driving the prices above where sales were four or so months ago, he said.
Last month’s sale of Downey’s former Bayview Corporate Center campus is one such local example.
The building, which is about one-third occupied, sold for $50 million, or $157 per square foot, according to reports.
That’s at least $20 per square foot above what many local real estate watchers expected the building to trade, because the high vacancy made it less attractive to buyers.
S.K. Hart Properties LC, a real estate company owned by Salt Lake City-based businessman Khosrow Semnani, bought the two-building campus following an auction overseen by the FDIC.
Similar trends are being seen across the country. The prices paid for commercial properties in the U.S. were up 4.4% in the third quarter, according to the Massachusetts Institute of Technology’s Transactions-based Index of Institutional Commercial Property.
That’s the largest increase seen in the market since the beginning of the downturn in the commercial real estate market began in mid-2007, according to officials at the MIT Center for Real Estate.
The index still is down nearly 37% from the peak of the market.
More pain could be in store if and when commercial mortgage-backed securities properties are put back on the market.
It’s estimated that nearly $300 billion worth of commercial mortgages will mature next year, and another $300 billion will come due in 2011.
