Tag Archives: Irvine real estate

New Office Construction Down 91% in Orange County – Dozens of High-Rise Projects Stalled

An ominous sign for the Southern California commercial real estate market – and for the economy in general – is the report this week that office construction in Orange County, California, plunged 90.8 percent in the second quarter of 2008 from last year’s figures.

According to a report from Voit Commercial Brokerage, “The first half of 2008 has been characterized by a significant reduction in office development in Orange County.” 

“The total space under construction in Orange County at the end of the second quarter is 325,276 square feet,” said Jerry Holdner, vice president of market research for Voit Commercial Brokerage. “The total amount of construction is 90 percent lower than what was under construction at the same time last year.”

A drive down the 405 Freeway in Irvine shows dozens of stalled high-rise office construction projects.

Perhaps another indicator of the bust in office construction are the recent closings of several high-end restaurants in the Irvine Spectrum, which had relied substantially on business lunches. 

The slowdown in new office construction in Orange County means that more jobs will be lost in the building sector, and indicates that few companies plan to expand, or move to, this affluent and still high-priced Southern California county, which had served as the epicenter of the subprime mortgage industry.

On the other hand, the lack of new construction will likely mean that the vacancy rate for Orange County offices, which has been climbing steadily, will come down.

The vacancy rate is at 14.46 percent this quarter, which is significantly higher than the 8.95 percent vacancy rate recorded in the second quarter of 2007.

Commercial Real Estate Still Resisting Slump — But Caution Advised

Standard & Poor’s announced the results of it’s January S&P/GRA Commercial Real Estate Indices (SPCREX) yesterday, showing that commercial real estate prices across most sectors are either holding steady or still rising despite the subprime crisis and the free fall in the residential housing market.

According to David Blitzer, Managing Director and Chairman of the Index Committee at Standard & Poor’s, “The National Index was relatively flat for this month and all sectors and regions are losing momentum compared to a year or two ago. At the same time, there were some big moves in the individual components.”

More specifically, the report found a national composite annual price appreciation of 7% from January of 2007, up from the 6.7% price increase reported in December’s data but still far below the 14.5%, peak price increase reported in June of 2006.

In the property sector, Warehouses reported the biggest gain for the month with a 1.9% increase and a 12 month increase of 10.1%. Office reported the only monthly decline of 0.2%, but has still returned 9.9% over the past 12 months. Apartments and Retail reported annual gains of 5.8% and 4.3%, respectively, from January of last year.

Among the regions, the Northeast had the highest return over the previous month at 1.4%, as well as the highest annual return over the past 12 months at 9.4%. The Desert Mountain West reported the largest price declines in the January/December period at -1%, but still remained marginally positive (up 0.9%) on an annual basis. The Mid Atlantic South and Midwest regions also reported slight declines.

Blitzer cautioned against reading too much that was positive into the data.

“Compared to residential property price trends, the impact of financial market developments remains unclear for commercial property,” he said.  “We do need a few more months of data to see if this market is going to remain relatively healthy or follow in the path of the U.S. housing market.”

We think that apartments will increase or hold their value as more homeowners are forced back into renting.  We also think that slower retail sales will eventually have a negative impact on retail real estate, at least in certain regions, and that the office sector, particularly in areas hit hard by the residential meltdown, will also suffer. 

We think too that, even more than residential real estate, the value of commercial real estate will depend on the health of the local economy.  In areas where the local economy is still strong, such as Austin, Denver, Seattle, and New York, commercial real estate prices will continue to increase.

On the other hand, where we work — Irvine, California, the epicenter of the subprime mortgage meltdown — we expect sharp decreases in value, partcularly in the office sector.