Insider Q&A told slump holds ‘tremendous opportunities’

October 18th, 2008, 12:20 am · 32 Comments · posted by Jeff Collins

Birtcher

Irvine-based Birtcher Development and Investment sold much of its properties during the past 2-3 years, capitalizing on the commercial real estate boom and avoiding the slump and the credit crunch.

President and sole owner Brandon Birtcher, great-grandson of the company’s founder, said he never expected the magnitude of the current economic crisis, but yes, he said, he did foresee a downturn in the market.

“You can’t view a seven-year run,” Birtcher said, “without some high probability of it’s almost immediate end.”

Now, Birtcher is looking past the current crisis and planning for the next boom. Birtcher Development’s specialty is partnering with high-net worth families to develop planned business communities, build-to-suit developments as well as investing in existing industrial sites and business parks. Birtcher currently has 3.5 million square feet under development from San Diego to Seattle and west to Denver. Locally, Birtcher projects included the Lake Shore Towers in Irvine, the Xerox Center in Santa Ana and the South Coast Home Furnishings Center in Costa Mesa. So we asked Birtcher …

Us: Have you been a little more jittery lately?

Birtcher: Let me answer it two ways. I think these are very tumultuous times, and they are times clouded in extreme uncertainty and have created extreme caution through the debt and equity markets that real estate relies solely upon. As a result, there is a great deal of uncertainty in pricing as well how to deal with the appraisal process associated with loans. That’s created a great deal of consternation for both lenders and sellers and buyers and developers.

But on the other hand, it is times such as these that offer tremendous opportunities, and as a result, it is well advised for all of us in the equity communities and for those of us (seeking) … to acquire real estate to be alert and aggressive in our pursuit of opportunistic real estate acquisitions.

Us: How have things changed for your company since the credit crunch hit?

Birtcher: Obviously debt and equity has become a lot more cautious and the underwriting much more difficult. Therefore, we are seeing that it’s more difficult to get the returns on properties we plan to develop to qualify under the new underwriting standards. As such, returns have increased between 50 to 100 basis points higher than they were a year ago and land, as a result, needs to be valued at a more conservative price per square foot. It’s harder to find deals that actually qualify for acquisition or development. But there are many deals that do qualify, and cherry-picking those in the better markets are our highest priority.

The markets we’re looking in (are ones that have) the highest barriers to entry and/or the lowest vacancy or other compelling characteristics, such as proximity to the port (or) the freeway systems.

Us: How much longer until we see significant recovery in the residential and commercial real estate markets here in O.C.?

Check out our Huntington Beach real estate blog HERE!

Birtcher: I think that recovery is an interesting term in itself. Is it when the downward slide and bouncing off the bottom turns into a consistent rise on the graph? Or is it when we return a “normal” absorption or a “normal” vacancy rate? To benchmark that moment is a complicated answer.

But normal times I would characterize as where tenants are confident in expanding (their leases) or buying (new) facilities. It’s also when capital is aggressively looking to loan on conservatively underwritten projects. I’m going to guess that that might be anywhere between 12 to 18 months out from now, but for Southern California it will be a fairly rapid recovery. Maybe over an additional two to three years. So once it starts to recover, it should recover within 36 months.

And what I see driving that are a strong import and export industry, primarily through the port of LA-Long Beach, the biosciences and some sectors of technology, driving the expansion.

And I am also hearing stories of Southern California-based manufacturers who have put all of their manufacturing in China considering bringing that manufacturing back to the U.S. because of labor uncertainties, particularly labor shortages, labor unions, rising costs of labor abroad as well as shortages of electrical power. There’s rolling brownouts occurring in some manufacturing submarkets. And as a result, the delay caused for deliveries, and the certainty of that delivery, disrupt the just-in-time format that many distributors and retailers depend upon. … (So) I think we’ll see more manufacturing brought back to the U.S. and the U.S.-Mexican border in the next 10 years.

Us: What advice do you have to small investors who may be looking to put some of their assets into real estate? Should they act now, or wait?

Birtcher: Well, small investors, one is be patient. Two, avoid the temptation to gamble on these extreme highs and lows in the stock market. Stay with quality. Do your homework and due diligence thoroughly. And when it comes to commercial real estate investment, I would stay with the smaller industrial and retail properties that require fewer tenant improvements than office projects do, especially the industrial sector. … Compared to retail and office, (industrial has) a lower per-square-foot valuation, and as a result your mortgage per square foot is less, you’re personal exposure to payments when the building is empty are less than retail or office.

Us: Do you have any recommendations as to residential investments?

Birtcher: I would yield to a good residential developer to give advice there. But I think the same principles apply. You want to do your homework thoroughly, be patient, not let an acquisition become an emotional buy. And I would probably buy a quality product at the lower price in an upper-end neighborhood, so the price is being pulled by its neighbors upwardly rather than (improving) the price for the neighbors.

I’ll tell you what else will be attractive in the next wave of investment in residential will be proximity to excellent schools and lifestyle amenities and shopping and entertainment nodes.

Us: Where do you see development and investment opportunities for Birtcher?

Birtcher: I think they’ll be in areas where barriers to entry (are high) and absorption projections look strong for the next three to five years. Those will be port-related, industrial communities where there is a strong presence of multi-tenant properties (and) access to the freeway systems. I think (they’ll also be) joint ventures with land owners or building owners who want to reposition their property or buildings.

Us: What markets have the best opportunities, and where does Orange County and Southern California fit into that picture?

Birtcher: Let’s just start with the macro West Coast. From the West Coast perspective, I think California’s in the best position because of its transportation and its lifestyle amenities and its diversification of labor base. Those are enormous amenities that will attract industry.

The detractors will be our elected officials who create either divisive or negative incentives — that’s almost an oxymoron. Negative legislation, that will either through greed or mismanagement will attempt to dissuade industry to expand or grow in California. And there has been an enormous amount of legislation in the last five years that have been going to the detriment of industry locating in California. And there needs to be an aggressive reorientation of our political rhetoric to focus on keeping existing industry that are here and growing them and attracting new industry.

We have become a victim of aggressive predatory states and metropolitan areas in the West that are licking their chops when they see what California is doing to dissuade industry to stay and therefore make our industries prime targets for relocation.

See what other insiders have told Insider Q&A in recent weeks …

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mav says:

October 18, 2008 at 7 am

you folks who doubt deflation is upon us…

…. please go out to any middle class retailer this weekend
…. and witness fire sale prices and a depressed atmosphere…

D E F L A T I O N

… it will be with us for 2 - 3 years… as the stock market crashes, home prices plunge, unemployment rises, incomes decline, the fed rate is driven to 0%, consumer credit collapses, and all assets deflate…

all this while the fed hoplessly increases the money supply…. leverage is replaced with de-leverage… as all types of toxic debt (not just mortgages: see consumer and commercial) defaults and cash needs dominate market forces…

Mulliganville says:

October 18, 2008 at 10 am

Funny, I was at the Spectrum last night…a few retailers were having sales…like the Gap (ugh–who likes the Gap?), and there were plenty of people…most restaurants were packed and on a wait. The theater was hopping. But perhaps you shop at Mervyn’s mav :)

Tom M says:

October 18, 2008 at 1 pm

Mulliganville,

Ya, I was also there. The employment agents were soliciting people waiting on line for restaurants with jobs paying 100k plus.

All these people with those offers, it’s so annoying. Everyone here in the OC has a job, right Mully.

Slump holds ‘tremendous opportunities’. Keep your powder dry folks because the opportunities will be even better next year.

lee in irvine says:

October 18, 2008 at 2 pm

The secret is out!

I think it would be a great idea for Jon to interview Lawrence Roberts, aka Irvine Renter, and author of the book, The Great Housing Bubble, and primary blogger at Irvine Housing Blog.

http://www.thegreathousingbubble.com/

Financial Crisis says:

October 18, 2008 at 5 pm

On Monday Evening Financial Crisis Conference Call - October 20th 9:30 PM Register in Advance -Limited Space
https://www2.gotomeeting.com/register/133177326

Mike Morgan We will hold a conference call for Clients and non-clients at 9:30PM Eastern on Monday, October 20th, to discuss the markets and what’s next. The last call we held, on Sunday, September 28th, had 352 attendees . . . and the call lasted more than four hours. I am going to try to limit this call to three hours, but I will take as many questions as possible. I suggest you email questions in advance, as we will address advance questions first.

We will discuss . . .

How We Got Here

Where We Are Now

Where We Are Headed

How To Prepare for What’s Next

How To Invest in Troubling Times

https://www2.gotomeeting.com/register/133177326

October 18, 2008 8:08 PM

October 18, 2008 at 6 pm

Tom…

I referenced what I saw…to infer the merchants were giving away stuff is insincere. Your response was looney. Typical bear…way to exaggerate to make your point.

Mick says:

Sure. The next boom is here. Housing is so affordable here in OC already…

Ha ha ha ha.

rants says:

hey gilligan youre not suggesting
orange county isnt in a recession are you?
maybe you missed the article from the register—
29000 jobs lost in the mighty OC– maybe
all those people you saw at the spectrum are
like you — independently wealthy — more likely in
debt up to their ass and still cranking out those
credit cards– some people never learn– that is until
they have to–

by the way– the stock market will retest its lows– because
as long as home prices keep falling the economy will
keep contracting in a deflationary spiral– the government cant
stop it -the fed cant stop it—- neither mccain nor sloboma
can stop it– even the mighty warren buffett cant stop it

http://ocbiz.freedomblogging.com/2008/10/17/oc-job-loss-worst-in-14-years/4072/

sanity clause says:

If he’s talking his book I feel bad for him. His book sucks.

Bill says:

October 18, 2008 at 7 pm

Mulli,

Most restaurants were packed because it takes so long to get served now since most restaurants have laid off the majority of their help.

There’s one waiter for every 12 tables now.

Credit card delinquencies are the next bomb to drop so those restaurants will be empty before you know it.

While you’re counting people drinking free water at the Spectrum here’s what’s really going on.

http://countrywide-foreclosures.blogspot.com/index.html

October 18, 2008 at 8 pm

Nope rants…personally, I feel we have been in a recession for longer than you would probably believe. I simply responded to this:

–mav Says:
October 18th, 2008 at 7:16 am

…. please go out to any middle class retailer this weekend
…. and witness fire sale prices and a depressed atmosphere…–

So upon doing so, I did not see what mav suggested. That is not to say everything is “a-ok.” It was a subjective analysis on one night at one shopping/dining complex. Nothing more.

I will leave the cheerful forecasting to the likes of you and the rest of the bear fraternity.

Bill, you counting waitstaff now? Do you ever stop analyzing?

Oh I almost forgot…..

Go Horns…

October 18, 2008 at 9 pm

There are tremendous opportunities now? At this time? I’ll tell you, if these are great opportunities then the opportunities of several years ago were freaking out of this world!!! The current home prices are still sky high.

Patricio says:

October 18, 2008 at 10 pm

I have a tremendous opportunity to have a depreciating asset and a huge debt slung around my neck if I am dumb enough to buy at the middle of a market on it’s way down. Who doesn’t want to lock up a depreciating asset of hundred of thousands of dollars…again HUNDREDS OF THOUSANDS of dollars for an unknown length of time that may or maybe never come back…me me me me…sign me up!

Eat it in the OC says:

October 18, 2008 at 11 pm

Mulli what do you get out of this exactly? Have you even taken the pulse of the small business in this county. You went to a central large mall to take stock of our economy? Try going to a small strip mall in say Tustin or Santa Ana or maybe even Lake Forest and ask a couple of local shop owners how business is going…

jake says:

October 19, 2008 at 3 am

I don’t read this blog much anymore. Got better things to do with markets crashing.

But you guys still are arguing with the t r oll.

Don’t you have better things to do?

It makes me long for fireman Nick.

Let me just add that the root cause of our economic woes is that the global structure of business is retarding innovation vs the size of the population.

So we have a very large population with a tiny group of innovators and an even smaller group that owns the fruits of the innovation. This will mean that wealth will be more and more centralized.

Thus you see the computer software field dominated by IBM, Apple,
google, microsoft, adobe, and oracle. Those probablely have 90% of market and the crumbs are left for the rest.

The dominance is maintained through the patent and copywrite system which was contrary to popular belief not handed down by god.

So whether a few people can grab resources by financial trades is fairly irrelevant, being a zero sum game.

Productivity can only improve as we encourgage innovation and distribute the fruits of this innovation across the population.

This is what a free market place should do. But the average joe plummer believes that a free market place is one dominated by large corporations with the little guy picking up the crumbs in his 250k plumbing business. A nice myth. I like the one about Santa Claus but they are kind of close. Santa is just one global company handing out goodies to good little boys and girls.

We need anti trust to break up Santa’s scheme.

And just one more thing for you computer types.

Consider the baud rate of what you are reading. WHat about 300 baud.

Now consider the baud rate as you observe the world. It would be what 30 gig maybe. Hmm about about 100 million times faster.

This means that as I describe things to you I cannot get anywhere near to reality unless we already share almost exactly the same reality and I can reference that reality.

This means that communication between people with differenct expereriences is woefully inadequate.

Ps unless you come from the computer world you are not going to get this.

October 19, 2008 at 7 am

gilligan is not headed to a deserted island….. gilligan is headed down with the ship…. someone will have to pry the credit card out of his hand….

Worth reading from Peter Schiff:
———————————————-
October 17, 2008

U.S. Economy Still on Life Support

On Monday October 13th, the Dow took the fifth biggest upward leap (in percentage terms) in its history and, most notably, since the 1930’s. It appeared that Paulson and his fellow G-7 finance ministers had solved the credit crisis. Despite the fact that G-7 taxpayers will be stuck with $3.5 trillion of liabilities to support their governments’ bailout plans, the stock markets nevertheless bustled with euphoria. The next day, reality dawned once again, and all markets closed down.

The truth is that these enormous bailouts enacted around the world, most notably in the United States, have done little or nothing to tackle the enormous deleveraging that is driving us into a serious recession and, if badly handled, a depression. Increasingly, politicians and commentators are talking about the need for a massive, new stimulus package, likely to cost trillions more dollars.

The extraordinary thing is that virtually no one dares even to mention the real underlying problem–that America has for the past thirty years been consuming more than it produces. During that time, the American consumer, accounting for 72 percent of Gross Domestic Product (GDP), has been financed from the retained earning of foreigners, most notably of China, Japan and more recently Russia.

Based on the willingness of these foreign producers to provide the funds, Americans have engaged in an orgy of easy credit and excessive consumption. In short, America is no longer paying its way, and is living off the earnings of its economic neighbors.

It is a rake’s progress and can not last much longer, especially as the creditor nations, such as China, will soon need their own money back in order to finance their own leap to ‘developed’ economy status.

Millions of words have been spoken over the last month alone about how America must solve its economic and financial problems. But the stark realities that will result from massive deleveraging in the face of a massive recession have been barely considered. Apparently, no one dares to mention it.

We feel our readers should maintain an acute awareness of these underlying problems, particularly as the Presidential candidates, financial regulators and Wall Street cheerleaders appear bent on concealing the underlying truth.

The $3.5 trillion thus far committed to lubricate the credit markets have yet to produce any meaningful result. Even that vast total is unlikely to be sufficient to meet the tidal wave of bad loans yet to hit the banking system.

As the massive Bush-Greenspan credit orgy deleverages, corporate profitability is likely to fall dramatically, driving stock prices still lower, further eroding personal retirement accounts. Once confronted with unemployment and bleak prospects, even those who have been model financial citizens will be forced to default on credit card debts, auto and personal loans and, of course, home mortgages.

The tsunami of defaults crashing into our banking sector will ultimately overwhelm all government attempts to contain the damage.

As the mighty American economy shrinks, other countries, such as China, will see their export earnings fall. They may have to sell parts of their vast holdings of U.S. Treasury bonds, driving still higher the cost of dramatically increased U.S. Government borrowing.
——————————————
TA TA

bill says:

October 19, 2008 at 8 am

muli says;

“Bill, Do you ever stop analyzing?”

A realtor’s worst nightmare.

I’ll stop analyzing and become a blind sheeple (the way you like um) as soon as you hop back on that turnip truck.

As taxes, unemployment and interest rates continue to rise the death spiral in housing prices will continue to accelerate.

http://www.fin24.com/articles/default/display_article.aspx?Nav=ns&ArticleID=1518-1783_2412210

shockg says:

October 19, 2008 at 9 am

Jake, Please seek help.

Dina says:

October 19, 2008 at 11 am

Throw me the card so I can charge it up before he sinks. No one is responsible for debt anyway.

Bill,

You are welcome to analyze everything you come across. I found it funny…that is all. “Well, according to my HP AlphaServer SC45 supercomputer, the amount of waitstaff is parallel to the stock market’s rapid decline, economic deflation, and a myriad of other factors only worthy of Berkeley grads.” Uh, ok. How about Javiers and Cheesecake were packed. Forgive me if I do not cruse to the local strip mall on a Friday night. I just happened to catch mav’s post upon returning home…what, you thought I would go test his theory?
_____________________________________________________

What I believe (this might surprise some of you):

We are in a recession and have been for many months.

Home values will decrease 10-15% over the next 12 months.

People will still buy homes during this period of time….there is nothing any of you will be able to do to stop it.

The holiday shopping season will be the worst on record in 20 years.
______________________________________________________

Rants: check card purchases only grumpy.

Jake: oh Lord. I will just pray for you.

jon, posts are getting lost…this site is horrible these days. truly pathetic.

waitingforgodot says:

Copy everything before posting. It’s annoying, but it’s better than losing that witty rejoinder to that you stayed up all night thinking about.

edit: “to that bull / bear”

Republicans are TRAITORS says:

October 19, 2008 at 12 pm

Hooverville and I agree, finally.

I am sick and tired of trying to post on this site. It takes forever to try and get a thought through.

I do that…but lately, you send it, the blog does not capture it, you try to re-post it and it says “duplicate comment.” Even though the comment is nowhere to be found. Truly lost in cyberspace.

Locaton says:

October 19, 2008 at 1 pm

Mulligan
duh- your comments are duplicate

Did you sit on the sidelines for so long to come up with that bit of “wit?”

mortgagemaker says:

October 19, 2008 at 3 pm

Hey Jonathan, why dont you get that ING “blow hard” back in here. Didnt he say all his loans are good and didnt i say that loans have nothing to do with credit but all to do with collateral about 100 times.

Slice	Price	Ch.	Sold	Ch.
House	$500,000	+18%	1,833	+11%
Condo	$290,000	+7%	881	+22%
New	$617,500	+24%	171	-17%
All OC	$435,000	+10%	2,885	+12%

Orange County Register