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Outlook dimmer for commercial real estate in 2008, forecast says
December 4th, 2007, 12:08 pm · 9 Comments · posted by Jeff Collins
Register reporter Jeff Collins has this report …
The boom that boosted commercial real estate — office buildings, industrial sites, apartments, retail centers, hotels and other non-residential properties — is expected to slow in 2008 in the face of a slowing economy and a credit crunch caused by a subprime mortgage meltdown, according to the 29th annual forecast by PricewaterhouseCoopers and the Urban Land Institute.
The “Emerging Trends in Real Estate” report was released last month. But local real estate professionals got a first-hand presentation this morning at a local Urban Land Institute session held at Irvine City Hall. And a panel of local industry leaders gave their own predictions for commercial and residential developers here.
Among the highlights of the national forecast, which is based on a survey of 600 industry experts:
- U.S. real estate markets “face greater downside risk” in 2008 due to tightening credit markets and increasing concern over a slowing national economy.”
- The commercial market will shift away next year from a seller’s market toward more of a buyer’s market.
- The key investors next year in commercial real estate will be those with cash as financing costs edge up and underwriting standards tighten. “Pension funds, REITs and foreign investors will step up activity.”
- Commercial development will remain steady or slow as “increasingly more risk-adverse investors back off new projects.”
- The housing downturn will continue for at least another year: “Adjustable-rate mortgage resets and increasing defaults and foreclosures dampen housing market outlooks through 2008, possibly into 2009. Any recovery will be slow and fitful.”
To some extent, Southern California and other “global gateway” metro areas will be spared the full impact of any commercial real estate slowdown, the report says, although it specifically notes: “The Orange County office market softens: mortgage bankers issue a ton of pink slips, and some companies belly up.”
A panel of local industry leaders noted that values for commercial properties in Orange County will decline next year from 3% to 15%, depending on the type and quality of the building. The panel provided the following outlooks for Orange County’s office, apartment, retail and housing markets:
Jeffrey Spindler, president Park Place Partners Inc. on residential development: Values for residential land is falling — by 70% in the case of one undeveloped housing tract in the Inland Empire. Prices for new homes in the region have dropped 20% to 30%, and likely will fall 10% to 15% more before turning around. “We have not found the bottom,” Spindler said.
William Flaherty, senior vice president for marketing, Maguire Properties Inc. on the office market: The outlook for the O.C. office market is cloudy, while a year or two ago it was incredibly bright. Today vacancies are under 10%, but they are expected to go up due to the collapse of many subprime lenders based here (New Century was a tenant of Maguire’s until it went bankrupt) and to new construction. Flaherty added that the global credit crunch has crunched demand and prices for office buildings, which had quickly traded hands at the start of 2007. “It’s clear that the world’s changed on Aug. 2 with the credit crunch,” he said.
Kevin Andrade, senior managing director for Trammel Crow Residential on the apartment market: While apartment vacancies are extremely low in Orange County at 4.3%, it’s expected to rise to near or just above 5% next year because of a lack of job growth here. It should be around 5.1% by the end of 2008. Although a record $364,000 was paid per unit for the Meridian Town and Country Apartments in Orange last summer, prices for apartment buildings are holding steady or coming down. “(It’s) still a healthy market, just not as robust as it has been,” he said.
Nelson Wheeler, partner at Strategic Retail Advisors on the retail market: The local and national retail markets should follow the same trend, relying heavily on consumer confidence and the financial health of consumers, which could be hampered by the housing slump. That translates into a tepid holiday season for retailers this year, although big discount outlets like Costco and Wal-Mart should do well.
To read a recent New York Times story on the Emerging Trends report, CLICK HERE .
December 4th, 2007 at 1:15 pm
so now it is spreading to commercial real estate too.
December 4th, 2007 at 2:56 pm
Funny, these guys seem to be on front lines of things, and yet they contradict all the points that the bulls try to make.
The first thing I thought of was Calculated Risk. I checked, and there is post on this. And, CR said exactly what I was thinking:
They could have just read this blog earlier this year!
December 4th, 2007 at 5:22 pm
Yep, CR has it right, again as usual.
Wow, truthi and the less eloquent baby boomers must be sweatin’ with all the bad housing news today.
Did you hear about the trouble OC is getting into with SIVs? It really is the 90’s downturn all over again!
December 4th, 2007 at 11:09 pm
Like i said 2 months ago…. A ton of new “for lease” and for “sale signs” in commercial areas in OC… and THIS IS NOT A good sign…
PRICES AND RENTS ARE DROPPING
December 5th, 2007 at 1:40 am
OC credit crunch again?
The credit crunch has taken a tiny bite from Orange County’s investment pool.
Treasurer-Tax Collector Chriss Street said Tuesday he discounted 17 county-owned securities by nearly $14 million after a ratings agency warned it might downgrade the securities.
The discount amounts to less than half of 1 percent of the $6 billion pool. So far the discount exists only on the county’s books. If Street can avoid selling the securities he should eventually get full value for them.
Street said he doesn’t plan to sell the securities because "there’s no need. … These investments are still rated triple-A," the highest possible rating.
ROFL, dude… there are no bids for this crap, AAA or not. And, how much longer before these are no longer rated AAA? Just keep holding on to it, don’t worry, the market will come back.
The county has been buying structured investment vehicles since at least 2001 but stepped up its purchases two years ago. Today it owns $830 million worth, or 14 percent of the pool’s total assets. That’s up from 5 to 10 percent two years ago, said Paul Cocking, the treasurer’s chief portfolio manager.
Street and his staff said they’re convinced the assets underlying these securities are healthy.
For example, while about 15 percent of the assets are mortgages, they’re outside the troubled U.S. mortgage market in places like the United Kingdom, the Netherlands and Australia, financial analyst John Byerly said.
The securities are sold only to big investors who typically must pay at least $500,000 to get a stake.
Orange County is the sole owner of some of these securities and, in other cases, is among four or five owners, Cocking said.
Oh great, that makes me feel soooo much better. So, you have been buying more of this crap as it has become crappier. It’s not like the UK is in a housing bubble or anything like that. I mean, they have even less land than we do, and that makes it safe.
These securities typically pay about 5.25 percent to 5.65 percent, a fat return for risk-wary government investors.
WTF? Are you serious? This garbage isn’t worth a 10% return for the amount of risk. And, if an under 6% return is fat, then that better be on a monthly basis, not annual. Risk-wary would have bought treasury bonds when they hit 5%, not toxic waste.
Among the skeptics: Pimco, the Newport Beach-based bond trading giant.
"We didn’t think they paid enough for the risk," said Josh Anderson, a Pimco expert on the securities.
Pimco has bid on assets held by some troubled structured investment vehicles, Anderson said, and "they aren’t pretty."
That is the most sensible part of the article. My gawd, I am having a deja vu.
Why is Chriss Street still in his position again? Is he taking advice from Robert Citron?
December 5th, 2007 at 3:13 pm
truthy and the other morons remind me of dealing with my 4 yr old. But why daddy, why? Why can’t trees go to sky? My realtor told me they do so that has to be true, isn’t it? Everybody has 20% down and is itching to buy, right? The market is going to bounce back and then you will be priced out, won’t you?. etc. etc. Meanwhile, the grim economic news just keeps rolling in. As far as commercial real estate — a correction is far overdue. A commercial real estate developer know lives the most ridiculously lavish lifestyle on the thinnest of education imaginable. All because of the good times that have rolled his way for 7+ years now. But commercial lags residential just a bit so his magic carpet ride will be landing quite soon.
December 5th, 2007 at 3:19 pm
I meant to say “a commercial real estate developer I know” but whatever. The fact is that he has had earned way too much money too easily for quite a while. The same crazy, unsupportable appreciation in homes has been mirrored in the commercial realm. Oh, the humanity when all these commercial real estate deals unravel and the bad debt just grows and grows.
January 21st, 2008 at 9:01 pm
“The sky is falling, the sky is falling” is all I hear from the media and bloggers who seem to have no historical perspective about OC commercial real estate. Enough is enough! This snowball has been growing for too long and it is all based on perception rather than reality. Articles like the above send a false message about OC commercial real estate. This is not the 90’s!!! The county is not over built and vacancy rates in aprtments, industrial, and retail are all in the single digits!!!!!!
Commercial real estate has many sectors and most of them are just fine. For example, Orange County industrial has extremely low vacany (5%). Basically that means that if you want to buy or lease an industrial building you will most likely have a difficult time finding one that meets your needs. Thus prices remain stable.
Sure development has slowed but that doesn’t mean prices are dropping. There is still a shortage of supply in Orange county and this lack of product will act as a hedge against the economic downturn. Bottom-line if you need a building for your business and plan on holding it for the long term then buy. If you want something for a year or two then rent.
Whatever you do know this - real estate out performs equitys and bonds over the long term!
I understand there is a dark cloud over the economy but just becasue housing is over inflated it does not mean commercial is as well. There are thousand of houses for sale and only hundreds of commercial buidings available.
February 4th, 2008 at 10:07 pm
Great article on the real estate happenings, I really enjoy reading your posts. Just for your information, Donald Trump is in
big trouble right now with his real estate empire. I hope everyone can pull through this slump!!