More money woes seen for big O.C. landlords

September 5th, 2009, 12:05 am · 6 Comments · posted by Jeff Collins

Tom Sherlock, senior managing director for Buchanan Street Partners in Newport Beach, is this year’s president of Southern California chapter of NAIOP, the National Association of Industrial and Office Properties.

NAIOP bills itself as the nation’s leading trade association for developers, owners, investors and other professionals in commercial real estate. The SoCal Chapter, made up of members from Los Angeles and Orange counties, is the nation’s second-largest chapter with more than 1,200 members.

We wanted to get his take on what’s been seen as a deteriorating commercial real estate sector.

Us: The years 2006 and 2007 saw a frenzy of commercial property investment, with soaring numbers of transactions and record prices. The culprit — as with the residential real estate frenzy — was easy financing thanks to commercial mortgage-backed securities sold on Wall Street. Since then, CMBS’s have dried up, money to refinance short-term purchase loans is scarce and many of the deals made in the frenzy are going bust — sometimes selling for pennies on the dollar. So with that background, what’s the current state of commercial real estate?

Tom: It’s still a difficult market, but we’re seeing signs of capitulation on the part of property and note sellers. There has been some activity on the transaction front as the new market realities are slowly being accepted by some of those who need to sell asset or paper.

Nonetheless, there is still a dearth of capital and many over-leveraged assets that need to clear through the system before the industry can move adequately through this cycle to a growth mode.

Us: What are prospects for the Orange County commercial market in the next six to 12 months?

Tom: The short-term commercial real estate prospects for Orange County are mixed.

The office market will continue to experience falling rents and rising vacancies as the lagging effects of the recession, coupled with the excess supply of space, influence the Orange County office market. Industrial will fare better due to its generally lower risk profile, supply/demand fundamentals that are in better balance and the fact that as an asset class it is positioned to more quickly benefit from an economic rebound.

Us: Is the worst behind or ahead of the commercial real estate industry?

Tom: The largest quantity and most severe of the ‘bad news surprises’ are past us, for the most part. However, operations at the property level will continue to deteriorate before they get better.

There are just too many troubled lenders and too many over-leveraged properties with maturing loans to believe the problems are behind us. These two factors will lead to some more inevitable surprises like Maguire’s recent turn over of five OC office buildings to the lenders.

I anticipate multi-family and industrial will turn the corner in the next 12-18 months with office and retail rebounding in the 12 months after that.

Us: This now a great time for investors?

Tom: Distress creates interesting investment opportunities and this cycle is no different. Experienced people and firms with available capital and minimal legacy portfolio issues see attractive investments now and will likely see more in the near future.

Investments in or through debt appear more prevalent today, but we at NAIOP believe tremendous opportunities are coming in the equity space. Southern California is a great economic engine; if legislative issues are addressed thoughtfully as win-win for the populace and business, today’s new investments will yield excellent returns over time.

Us: What surprises have you seen in this developing downturn?

Tom: One surprise was the speed at which the securitized lending market (CMBS) evaporated. Another was the pervasiveness of the capital contagion. In 2007 banks and CMBS accounted for 80% of all commercial real estate financing. When both experienced sea changes, the seizure in the flow of capital was swift and with brutal consequences.

Us: How far off is the recovery?

Tom: It’s a lot closer for the economy as a whole compared with the commercial real estate industry. Historically, it takes about 18 months after job losses cease before the bottom of the office market rental and occupancy levels are hit.

While national job losses are diminishing, they still exist. If history and some market research are good indicators, it’ll be 2011 before real estate owners see market rents and vacancy rates leveling. Inflation will be the wild card to watch though.

Us: What efforts is NAIOP taking? How is NAIOP addressing the industry’s needs in this crisis?

Tom: NAIOP SoCal has enacted a multi pronged strategy to support our members and address the industry’s needs as this time.

First, we’re proactively supporting constructive legislative and policy efforts on issues like the California water system, which is in great need of improvement. At the same time, we’re also working to defeat flawed legislation like the spilt roll tax that will cost California over 150,000 jobs while ultimately increasing consumer costs.

Second, we continue to provide educational and networking forums that address today’s business climate in an effort to help companies work toward positive solutions relative to their property operations or capital needs.

Third, we’ve expanded our educational and community reach into UC-Irvine through the funding of a new scholarship with UCI’s Center for Real Estate; the first recipient will be named in two months. This, in conjunction, with our award winning NAIOP-U and Young Professionals Group programs provide the industry with unparalleled ongoing educational opportunities for all stages of the real estate professional’s career.

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Jen says:

September 5, 2009 at 9 am

I have been saying for awhile now , There is not a huge over supply of Single family homes sitting vacant in most of SoCal, but apartments that’s another story.

OCCHICKEE says:

September 5, 2009 at 11 am

Why is the media pushing the “optimistic button” when it comes to home foreclosures and the economy? I just recently had to stop paying my mortgage Sept 1st due to being unemployed since March from my professional position. I have had a fixed 30-year loan since 2004 and have always been responsible and on time with my bills. I’m still interviewing for jobs and still feel there might be hope, but I’m not sure the bank cares.

I called IndyMac 4 times to request help since March, but they said they couldn’t do anything “until I was at least 2 months delinquent.” (Aren’t they supposed to “prevent” foreclosures?) My neighbor, who also owns a condo here in Garden Grove, had to deal with IndyMac Bank and they, after 8 months (Jan-Aug) of begging monthly to reduce her interest-increased mortgage and do a short sale, declined the new buyer’s offer and refused to help her. She’s still employed and was able to make her payment if they had just reduced the payments. She was blessed to recently get an apartment in spite of the circumstances of having to foreclose.

I’m not sure how OneWest (IndyMac’s new mortgage division) will handle my situation. I have unemployment benefits until June, and if they would reduce my mortgage payment, I wouldn’t have run out of money from my savings to pay all of my bills and mortgage up to now. (I receive 1/2 of the pay on UI that I was making while employed.) I truly believe the banks are keeping our tax dollars so they can hold on to the foreclosed condos and resell them when the price is right. They have the taxpayers’ money and they also have their borrowers’ properties. They are the richest, greediest people alive on this earth. I also don’t think Chase should have been allowed to get a bailout and then turn around and buy out Washington Mutual then raise their credit card interest rates from my 10-year fixed rate of 5.99% to 12.99% for no reason! They used taxpayer’s much needed money to purchase for their own pleasure, and are now gouging credit card holders for unacceptable interest hikes. Who’s monitoring them?

Here’s the bigger problem: California will have even a bigger “crash and burn” when those “thousands” of unemployed professionals with nice big homes will be running out of unemployment in December and not able to pay their mortgages anymore. You think this year’s foreclosures were bad, wait until next year. Let’s hear the good news about how the economy is starting to turn around. NOT! The crash and burn will continue until employers, supported by the big government, have faith in a system and government so they can start opening up jobs and hire again in California. This isn’t going to happen for a few years here.

Think about this scenario: December…just before Christmas…thousands of unemployed who will run out of UI benefits in OC looking for a place to sleep for the night, food and water for the day, a place to sleep in their cars, etc. Churches and charities and citizens need to get ready because thousands of people who don’t have relatives in California will need shelter. Can you imagine opening up your back yard so a family can pitch a tent until they find work? The state parks won’t allow them, nor city parks. So where will they go when the shelters are full (most only house 100 per night)? These are serious issues that need to be dealt with NOW before the crash and burn of 2009/2010. The economy in California is not getting better. I wish I could be optimistic, and I can, but not in California.

Until we get a president who will enforce a monitoring system, no bailout money should ever be given out. As for cash for clunkers, my nephew who is the financial manager of a dealership has only seen 2 rebates mailed back from the government out of over hundreds of cars they sold under Obama’s program. One of their partners has lost so much money through this that they are now filing bankruptcy for 2 of their dealerships. So, who in the media will begin to tell the truth about the misuse of taxpayer’s money? Who?

So, is the worst behind us? Not at all, and until the real numbers and real stories of what’s really going on in the unemployment, foreclosures, and job markets are exposed, everyone will go on believing as Mr. Rogers that, “it’s a beautiful day in the neighborhood.”

mav says:

September 5, 2009 at 7 pm

real U-6 unemployment in the OC is up to depression levels……. make no mistake about it, you are about to see the economy go to hell in a hand basket and retest march lows…… good luck to you and yours….
Coco says:

September 5, 2009 at 8 pm

I always thought that too much government assistance was going to the banks and big business. Many banks are paying bonuses to their executives and yet the services they should be providing to help regular people is almost nil.

Billions of dollars are going to Fannie Mae and Freddie Mac to buy mortgages so big investment companies and greedy speculators can purchase the poor unemployed person’s foreclosed home.

Yes, government stopped the economic freefall and market collapse. However, I really believe the real culprits who caused all this woe, the banks and major financial agencies, are making out like bandits. It really makes me sick when I think about the injustice of it all.

Swifty7b says:

September 5, 2009 at 4 pm

The governments or banks shouldn’t try to prevent foreclosures but instead speed them along. The recovery won’t begin until all the foreclosures are processed through the system. Delaying foreclosures further delays economic prosperity.

Scotty says:

September 6, 2009 at 1 pm

Well stated - OCCHICKEE

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