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Tuesday, Jun 18, 2024

Price Drops for Airport Area High-Rise Offices

Orange County office towers continue to see declines in their valuations post-pandemic, with a building in the South Coast Metro area trading for less than half its last sales price, and one of Irvine’s most valuable high-rise buildings being eyed for a potential sale after seeing a more than $50 million dip in value since 2020.

4 Hutton Centre, a 217,000-square-foot office tower that’s part of the 46-acre Hutton Centre mixed-use complex at the corner of MacArthur Boulevard and the (55) Freeway, sold in late February for $25 million, real estate sources tell the Business Journal.
Property records indicate the buyer is a family office affiliated with Joe Wen, the founder of multinational conglomerate Formosa Ltd.

Wen acquired the office in a value-add play, real estate sources tell the Business Journal.
The deal works out to a price of about $115 per square foot for the 10-story office in Santa Ana. It previously sold in 2019, when an affiliate of LaSalle Investment Management, a real estate investment subsidiary of Chicago-based JLL, paid $54.8 million, or $252 per square foot.

LaSalle sold the office a two weeks after listing the asset, sources indicate, hinting at a distress sale. The sellers were represented in the transaction by Newmark.

OC Activity

Wen immigrated to the U.S. from Taiwan as a teen and made his fortune through Formosa, a multinational conglomerate based overseas but with several local commercial real estate holdings in Costa Mesa and Foothill Ranch.

Wen is also the founder and chief executive of Sakura Paper Inc., a Cypress-based division of Formosa that makes and distributes a range of sustainable paper products.
Wen owns the former Foothill Ranch headquarters of mortgage lender loanDepot Inc. (NYSE: LSI), and is reportedly looking to offload that asset.

He’s perhaps best known locally for the sprawling mansion he built in Newport Coast. The 55,000-square-foot Villa de Formosa is one of the largest single-family homes in America.
Last June, Wen and his family donated $20 million to the University of California, Irvine for a forthcoming outpatient clinical facility at the new UCI Health-Irvine medical complex going up along Jamboree Road. It marked the largest gift to UCI Health by a donor under age 50.

Pricing Fluctuations

A sale of a higher-end office tower in the vicinity of John Wayne Airport for under $125 per square foot hasn’t been seen since the Great Recession, when the collapse of the area’s subprime mortgage sector left many buildings largely empty.

Offices in the Hutton Centre, which has six office towers, restaurants, a 349-unit residential tower complex, and two hotels, have seen some of the biggest fluctuations in price among OC buildings, depending on market conditions.

During better times, buildings in this area of South Coast Metro have approached $400 per square foot.

The peak pricing for 4 Hutton took place in early 2007, when it sold for $64 million and just under $300 per square foot, records from real estate market tracker CoStar Group Inc. indicate.

Remote work trends and other changing dynamics in the office market facing other area landlords appear to have been felt more noticeably of late at 4 Hutton, which counts a vacancy rate just over 40%, CoStar data indicates.

Mortgage company Kind Lending, started a few years ago by local mortgage exec Glenn Stearns, is the building’s largest tenant.

Another complex at Hutton Centre, the two-building Griffin Towers offices, are also on the market and expected to trade below their prior valuation, real estate sources tell the Business Journal.

Michelson Review

A few miles away, the owner of The Michelson office tower in Irvine, one of Orange County’s most valuable high-rise buildings, is considering options for that property and other offices it owns, following continued declines in their value.

Manulife US REIT, an owner of high-end office properties in the U.S., and whose stock (SGX: BTOU) is traded on the Singapore Exchange, recently hired a strategic adviser; a sale of its assets is one possibility, it said.

Its lone OC holding is The Michelson, a 19-story trophy property at 3161 Michelson Drive. The tower, running about 536,000 square feet, is near the intersection of the San Diego (405) Freeway and Jamboree Road, in the Park Place mixed-use complex.

“We have seen healthy interest from a broad range of counterparties including local and international real estate developers, REITs and private equity players” the REIT’s CEO, Tripp Gant, said last month.

A timeline for its plans is expected to be disclosed in the next few months.

The REIT’s stock price is off more than 70% since early 2020.

Pricing Ups & Downs

Toronto-based Manulife Financial Corp., the financial services company best known in the U.S. for its John Hancock Life Insurance Co. division, paid a reported $277 million for the Michelson tower in 2012.

At the time, it was the priciest single-building office sale ever in Orange County.
In 2016, Manulife packaged the Irvine property, along with other buildings it owns in the U.S., in an initial public offering that was listed on the SGX.

It was the first-ever REIT listed on the Singapore Exchange that focuses specifically on U.S. properties. The Michelson building was bought by the REIT for $317.8 million at the time of the IPO listing, though the REIT said its valuation was higher, at $328.6 million.

Just prior to the pandemic, its valuation was estimated by the REIT at an all-time high of $345 million, or $647 per square foot.

A year ago, the REIT placed a $317 million valuation on the tower, estimating it had lost about 8% of its value, or $28 million, since the onset of the pandemic.

Last month it chopped off another $25 million in value for the tower, with an estimate of $292 million, according to regulatory filings. That price works out to about $545 per square foot.

A sale near that per-square-foot price, if completed, would be among the tops in OC history, and would counter recent trends. Since the pandemic, low-rise and mid-rise offices with outdoor amenities have seen the most interest from investors (see Top Office Sales of 2022, page 20).

Occupancy at the Michelson tower has held up well, according to the building’s owner. The tower is nearly 91% full, with Hyundai Capital, the leasing arm of the Fountain Valley automaker, taking up nearly 100,000 square feet of space. LA Fitness also recently renewed it lease at the building for its headquarters, CoStar data indicates.

LA Woes

The Irvine office’s valuation, while off some $53 million from its peak, has held up better than other Southern California offices in the Manulife REIT’s portfolio.

In downtown Los Angeles, the REIT’s 35-story Figueroa tower now counts a $211 million valuation, a steep decline from $315.2 million a year ago. Nearly half the building was available for lease as of late last year, CoStar data indicates.

The Michelson now is the most valuable office in the REIT’s 12-property portfolio, according to the landlord’s latest estimates in February.

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