Bottom of the office market predicted: 18.6% vacancy next year

Vacancy will continue to grow in the country's troubled office market until some time year, but the bottom won't be as bad for landlords as it was in 1990, an industry researcher said today.

Several experts have predicted that 2010 would be the bottom for the office market in this real estate cycle, but CBRE Econometric Advisors went a step further and called the exact low mark: 18.6% average vacancy. That's just short of the depth of the last downturn 19 years ago, when vacancy peaked at a record-setting  19.3%. 

Don't expect to the market to start zooming up after it hits the bottom, though.

"While there are signs of improvement in the economy, it is unlikely that the job market will bounce back in such a way that commercial real estate fundamentals will quickly turn around," said Arthur Jones, CBRE's senior economist.  "The bottom may be coming into sight but there will be no quick return to glory days for the market."

Office rentals are a lagging indicator of the economy, so vacancy won't start going down again until businesses start hiring new employees. Expansion should finally begin in 2011, Jones said.

Average third-quarter vacancy in Los Angeles, Orange, San Bernardino and Riverside counties was 17.5%.

--Roger Vincent

Western Digital will move to Irvine in major lease transaction

Hard-disk drive maker Western Digital Corp. has agreed to move its headquarters to Irvine starting next year as part of an office space consolidation, the company said Monday.

Western Digital, now based in Lake Forest, has rented 365,000 square feet in the Park Place office complex on Michelson Drive in one of Southern California's biggest office leases of the year. The company, which was added to the Standard & Poor’s 500 Index in May, will move its 1,250 employees to Park Place in phases between late 2010 and late 2011.

Financial terms of the 10-year lease agreement were not disclosed, but landlord LBA Realty is asking for $2.15 per square foot per month at Park Place, according to the LBA website.

Western Digital's growth over the last 10 years required expansion into several locations near Lake Forest. Its acquisition of SiliconSystems Inc. in March added an office in Aliso Viejo. The leases for its current locations start to expire late next year, according to real estate brokerage Studley, which represented Western Digital in the transaction.

“Consolidating all our Southern California personnel under one roof will facilitate tighter team collaboration, improve operational efficiencies, rationalize facilities costs and offer flexibility for future growth,” Chief Executive John Coyne said in a statement.

Park Place is an enormous office, retail and residential complex next to the 405 Freeway. Most of the complex was completed in 1978 and once served as the headquarters of engineering giant Fluor. It consists of interconnected buildings, including a 10-story, hexagonal tower that is a local landmark.

-- Roger Vincent

Economist finds good news about commercial real estate by looking back

News from the commercial real estate front has been so grim for so long that economist Robert Bach at brokerage Grubb & Ellis has taken to writing a short e-mail feature called Good News Friday in an effort to buck up people's spirits.

He often has to dig deep for upbeat assessments, and today's column started off with a typical gloomy caveat:

"For commercial real estate, perhaps the last industry to join the recovery, recent news hasn’t been so good," Bach said. "Both the investment and leasing markets appear to be stuck in molasses."

Bach was able to tease out some "good news" by looking backward.

In the early 1990s, he said, commercial real estate had been badly overbuilt and was viewed by many as a nearly permanently damaged asset class. No new building would be needed until after the millennium, pundits said, but even then demand would be slight because advances in technology, such as computers and cellphones, would reduce the need to work in offices or shop in stores.

Those assessments turned out to be overly pessimistic, and most markets were recovering by the mid-1990s. Things weren't as bad as they looked.

Nowadays, commercial real estate is expected to begin recovering within a year and be strong by 2011 or 2012. "For evidence of this relative optimism, look no further than the growing reservoir of capital being raised to target distressed assets," Bach said.

So be of good cheer. The sharks are circling.

-- Roger Vincent

Commercial investors are expected to keep waiting for prices to fall

Investors looking to snap up commercial properties on the cheap as the economy hammers the commercial real estate industry have been disappointed all year, and they're pretty bummed about it.

Property values have declined on paper, but so far would-be buyers haven't been able to walk off with offices, shopping centers, hotels and warehouses at fire-sale prices. Very few properties are changing hands.

"Investors seem surprised at the lack of quality buying opportunities given the problems in the financial markets and the continued weakening of the industry's fundamentals," said Susan Smith, director of the real estate advisory practice at PricewaterhouseCoopers.

The accounting and advisory firm is expected to release a survey today that says investors are going to keep waiting because, they believe, many properties purchased during 2006 and 2007 are over-leveraged and lenders will eventually be forced to foreclose and sell them at a discount.

Investors surveyed said commercial real estate values will continue to deteriorate into 2010 in part because rents are still falling. Rents are expected to drop another 20% in Manhattan and San Francisco. Los Angeles and San Diego rents will dip another 10%, investors predicted.

-- Roger Vincent

Maguire results show bad times for commercial real estate

Maguire Properties Inc., one of the region’s largest office landlords, reported widening losses Monday and said it is about to default on more than $1 billion worth of loans on seven buildings in Orange County and downtown Los Angeles.

By giving back the keys to properties it overpaid for at the peak of the last boom, Maguire hopes that it can reduce debt enough to keep the company solvent. The company still owes $3.4 billion, however, company President Nelson Rising said.

But he insisted that the dramatic move to cut loose prime office buildings that the Los Angeles company can no longer afford to keep does not mean that Chapter 11 is also imminent. "We are not considering bankruptcy."

Maguire’s decision to default on its loans is a sign that the troubled commercial real estate market continues to decline in value and that more steep losses for landlords and lenders are coming, industry observers said.

-- Roger Vincent

Recession has brought a 'green' development decline, survey finds

So-called green real estate development--almost an industry cliche during boom times--has stalled during the recession and will not pick up for some time after a recovery, a new survey [.pdf] says.

The Newport Beach real estate advisory firm The Concord Group surveyed commercial real estate professionals on the status of sustainable projects. Developers, architects and others said that their motivations for beginning green projects had also changed: it's nice to save the planet, but these days, it's mostly about the money.

Key points:

• Resistance from investors and lenders will stall private developers' ground-up green projects through the recession and into a following recovery.
• The economic downturn has caused environmental benefits to take a back seat to financial gains.
• With private developers on the sidelines, it will fall to the public sector to champion and build sustainable projects.

The survey was conducted between May and June 2009, with a total of 101 respondents, 45% of them from development firms, 25% from architecture and planning, 16% from investment and lending groups and 7% from consulting and law firms and another 7% coming from construction.

-- Nathan Olivarez-Giles

Hotels: worse than you thought

Atlas Hospitality Group presented a bleak snapshot of California hotel sales today in its annual mid-year survey.

Only 49 hotels changed hands during the first six months of this year, compared to 100 a year ago, the Irvine hotel industry analyst said. And the number of hotels now on the market spiked 53% in the first six months of 2009.

Atlas President Alan X. Reay said that California is facing a record low in the number of sales, and a record high in the number of hotels that are up for sale.

“It’s really a perfect storm for California hotels right now,” he said. “If we continue at this pace, it will take 10 years to sell all the hotels on the market. And that is if there aren’t more hotels that become available for sale. ”

There are 941 hotels currently on the market, meaning there are more than 19 hotels unsold for every one that is sold. The typical ratio is closer to 2 to 1, Reay said.

To move forward, there needs to be a complete repricing of the market, he said. 

In Los Angeles County alone, the number of hotel transactions plummeted 91% in the first half of 2009.

The county also leads the state in the number of hotels having trouble paying their lenders. One of them, the 469-room Marriott Hotel in downtown Los Angeles, is the largest hotel in default in California.

California has a total of 250 troubled hotels that are either in default or lender owned. Reay said he expects that there will be more than 500 troubled properties by the end of 2009.

“If there’s any silver lining in this report," he said, "it’s that this is going to be the best buyer’s market in the last 20 to 25 years.”

-- W.J. Hennigan

Sands to buy Carson mall

Investor Fred Sands, who once ran one of the country’s largest residential sales brokerages, is adding to his growing commercial real estate portfolio by buying the large South Bay Pavilion shopping center in Carson.

In a sign of how much real estate values have declined since the recession began, Sands’ company Vintage Capital Group is expected to complete its purchase of the mall near the 405 Freeway on Thursday for $50 million.

That’s well below the combined $34.4 million Hopkins spent to buy it in 2003 and the $30 million it spent on improvements. Hopkins put the property up for sale for $100 million in 2005, but was unable to find a taker at that price.

"The world has changed," said Sands, who has bought and sold commercial real estate for many years. He formed Vintage Capital in 2001 to further his investment career after selling residential brokerage Fred Sands Realtors to competitor Coldwell Banker in a nine-figure deal.

The sellers are Newport Beach-based Hopkins Real Estate Group and its financial partner Genesis LA Real Estate Fund.

Genesis LA, a nonprofit corporation that provides financing for developments to benefit low- to moderate-income neighborhoods, had always planned to hold the mall for about five years and then sell and reinvest elsewhere, said Dana Haynes, development manager of the mall for Hopkins.

But Hopkins, which is part owner of a nearby former landfill being prepared for a new $800-million retail and residential complex called the Boulevards at South Bay, was not eager to sell the mall, Haynes said.

"We are disappointed to let go of it," Haynes said. "It’s not the best time to be a seller, but we found a buyer."

Sands said he plans further improvements to the 1.1-million-square-foot mall that is now anchored by IKEA, Target, Sears and JC Penney. The biggest addition would be a 16-screen theater complex, he said, and discussions are underway with two potential operators.

The 73-acre site has room for new construction. Sands said he plans to build as many as six free-standing restaurants soon and perhaps add a hotel when the economy improves. In the meantime, he said, "mid-scale" malls such as South Bay Pavilion can prosper.

"When your jeans wear out, you have to replace them," Sands said. "People still have to shop. People still have to eat."

Sands said he plans to bring more national retailers to the mall while avoiding luxury brands. "They’ve been hit the hardest" by the recession, he said.

Sands’ Vintage Capital also owns malls in Laguna Hills, Santa Clarita, New Mexico and Ohio.

More commercial real estate troubles

Los Angeles commercial real estate continues to spiral downward, according to a report released Wednesday by Real Capital Analytics Inc.

The New York-based real estate research firm found that Los Angeles had $4.5 billion in troubled commercial properties at the end of June. In all, RCA reported there were 263 properties in default, foreclosure or bankruptcy. At the beginning of the year there were 113 -- a 133% spike.

Don Walker, senior vice president of Irvine-based John Burns Real Estate Consulting, said the large numbers aren’t very surprising. He points to the skyrocketing unemployment rate, which now stands at 11.5%, and consumers’ current tendency to cut back on discretionary spending, as contributing factors for the downturn in the market.

Walker said the worst may be to come, because commercial real estate numbers traditionally lag behind residential.

"We might be in the early stages of decline," he said. "I don’t expect a turnaround until consumers regain confidence and the jobless numbers stop mounting."

But things could be worse, said Dan Fasulo, RCA managing director. Compared to the national picture, Los Angeles is faring well.

"Los Angeles has held up better than its peers," Fasulo said. "For example, you couldn’t give away a commercial property in the Midwest right now."

Nationally, RCA found 5,315 troubled commercial properties valued at more than $108 billion.

The report lists hotels and retail properties as the most "problematic sectors" and notes the bankruptcy filings by mall owner General Growth Properties Inc. and hotel chain Extended Stay America Inc.

The report said the lack of available credit is causing property to fall into default across the country and among every investor type.

"Excess leverage is endemic to every type of investor, all of which are facing difficulties refinancing mortgages as they come due," the study said.

The figures released Wednesday are preliminary, the report said.

-- W.J. Hennigan

Office rents seem steep? It could be much worse

What costs more in New Dehli, Warsaw and Ho Chi Minh City than it does in Los Angeles? Office space.  As much as tenants here like to complain about office rents, they are far cheaper in L.A.'s most expensive neighborhoods than they are in most other international cities, according to a recent report by real estate brokerage CB Richard Ellis.

In fact, Los Angeles' Westside, the region's most expensive office market, barely cracked the top 50.  The only cities on the list that were cheaper than L.A. as of March 31 were Toronto, Washington, D.C., Athens, Brussels and Beijing.

In a sign that the Japanese economy continues to mend, the inner central district of Tokyo edged out London's West End this year to take the top spot as the most expensive location for a business to set up shop. Those Tokyo rents are $183.62 per square foot per year, compared to $172.62 in London and $52.82 on L.A.'s Westside. Rounding out the top five were Moscow, Hong Kong and the outer central district of Tokyo.

The most expensive market in the U.S. was New York's Midtown district, which came in 21st at $68.63, right behind Ho Chi Minh City and Geneva.

-- Roger Vincent