Register reporter Jeff Collins says two more sources offered opinions foretelling the end of the commercial real estate boom …
• Stan Ross, chair of USC Lusk Center for Real Estate … He said today that the nation likely will have a weaker economy next year, and “that spills over into the commercial sector.” Ross stopped short of predicting a commercial downturn. But he warned that real estate investors, developers and service companies need to start preparing now for what could be a tougher business environment. He advises that they review their company’s financial health carefully, look at how their tenants are being impacted by the economy, study their cash flow and devise backup plans.
Commercial real estate “will clearly be impacted” by a weaker economy, Ross said. “The question is how much and where and what products.” Ross noted, for example, that the subprime mortgage mess affects tenants who are mortgage brokers and lenders (See Option One news HERE.) More stringent underwriting standards will mean less capital is available for projects. And capitalization, or CAP, rates will likely go up, which means that property values will fall.
“Not by a lot, not dramatically, but clearly, you start to see that creeping in,” he said of such declines. “Standby. It is a world of uncertainty. You’re not sure that something bad will happen or how deep it will go,” he said. “(But) it’s smart to do some planning. … Take a hard look at the implications for you.” To see Ross’ article, including key areas to consider in a financial health checkup, CLICK HERE.
• Jerry Anderson, newly appointed president of Sperry Van Ness, an Irvine-based commercial real estate brokerage … He forecast an end to a 7-year-long boom, saying that “the party is over.” issued a prediction today that commercial real estate values will decrease by 10% to 12% next year. That doesn’t include quality products; markets with barriers to entry; and those with predictable and safe rental incomes, he added. According to Anderson, investment real estate has soared since the year 2000, and records for borrowing, lending, sales and CAP rates have all been broken. The boom was based on “a false economy,” he added, saying that investors have been able to rush in and buy quickly, only to sell higher and higher.
“It’s had less to do with economics and everything to do with demand,” he said. “It’s been a wild ride, but now it’s over. We are moving back into a normal market.”
It is over but things wont get really bad until 2009 for the local Office sector. I think industrial will do ok just because of our location to the LA port. However the office sector is going to go in the Toilet soon. So many landlords bought all these buildings for crazy prices with the only thought being Rent Growth, Rent Growth, Rent Growth. Now due to the recession and the implosion of the Subprime market the Rent Growth will not be there. Vacancy will increase and lease rates will come down.
I think it is less a case about economics and more a case about the Bad Karma Orange County has from all the shady subprime lenders who lived and worked here. We created alot of the pain the whole world is going to feel and karma is ensuring it is going to come back to hurt us.
However, it is still a great place to live, luckily for some they will be able to afford a better house and office soon.
I don’t know about divine retribution hurting OC, but I agree that the office rents will be bigtime low for some time. Come to the Irvine Towers (home of now-defunct New Century): the Irvine Co bought it at absolutely the peak for in excess of 300 million and we sit here at $2 per sq. foot. There are new office buildings all around just coming on line yet the available offices were already partly vacant. Sure wish New Century hadn’t died, they had hired up all manner of whorish women who are sorely missed here at the Irvine Towers. Used to be plenty of implants to leer at, now just heifers and dudes. this bubble is killing my mojo!