COMMERCIAL REAL ESTATE
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The state of commercial real estate
Though times are tough, the future is bright, and there are plenty of deals to be had.
By Bill RamsPublished: May 01, 2009
For the past several years, Seabright Insurance Co. resolved claims from the ground-floor office of an aging red-brick mid-rise in the city of Orange. And the only views employees enjoyed were of a nearby parking structure.
Things have changed.
Capitalizing on falling rents and pressure on landlords to stabilize occupancy, the growing insurance company recently upgraded its O.C. offices. Now its home is the 15th floor of Orange Executive Tower.
The views are much better.
“You’ve got the ocean on one side and the mountains on the other,” says Justin Hill, one of the CB Richard Ellis brokers who represented landlord Muller Co. “The building offers arguably the best views in central Orange County.”
The premium Seabright paid to move into its prestigious new penthouse?
“It was a lateral move, rent-wise,” Hill says.
The national recession, the untimely opening of several new Orange County office towers and the collapse of the subprime mortgage industry (Seabright moved into former Ameriquest space) has created unprecedented move-up opportunities for companies with solid balance sheets and projected long-term stability.
But Seabright’s “flight to quality” is a relative exception in today’s commercial real estate market, in which tenants and landlords are “hunkering down,” says Jeff Osborn, managing director of CBRE’s Anaheim office.
For the most part, “tenants today are downsizing,” Osborn says. “The priority is cost containment and cost reduction. They are asking themselves, ‘Do we really need this space?’”
Landlords focus on occupancy
In a balanced market, the vacancy rate hovers near 10 percent.
Just three years ago, Orange County’s booming economy produced one of the tightest office markets in the nation. Vacancies closed in on 6 percent; rents spiked 12 percent in a year. Landlords held the upper hand in lease negotiations.
It has boomeranged back. By the end of 2009, some brokers forecast that one in five offices will be vacant; the current vacancy rate is 17.3 percent – up from 14.9 percent a year ago, according to Grubb & Ellis.
Kurt Strasmann, executive managing director of Grubb & Ellis’ Orange County and Inland Empire offices, says it could be more than a year before the situation improves. The health of the commercial market is tied to job growth, and most forecasts call for rising unemployment.
“We’ll have to burn through the job losses before there’s stability,” Strasmann says. Add a tight credit market to the mix, and landlords with loans coming due face an especially challenging short-term future.
What should they do?
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Things have changed. Capitalizing on falling rents and pressure on landlords to stabilize occupancy, the growing insurance company recently upgraded its O.C. offices. Now its home is the 15th floor of Orange Executive Tower. The views are much better. “You’ve got the ocean on one side and the mountains on the other,” says Justin Hill, one of the CB Richard Ellis brokers who represented landlord Muller Co. “The building offers arguably the best views in central Orange County.” The premium Seabright paid to move into its prestigious new penthouse? “It was a lateral move, rent-wise,” Hill says. The national recession, the untimely opening of several new Orange County office towers and the collapse of the subprime mortgage industry (Seabright moved into former Ameriquest space) has created unprecedented move-up opportunities for companies with solid balance sheets and projected long-term stability. But Seabright’s “flight to quality” is a relative exception in today’s commercial real estate market, in which tenants and landlords are “hunkering down,” says Jeff Osborn, managing director of CBRE’s Anaheim office. For the most part, “tenants today are downsizing,” Osborn says. “The priority is cost containment and cost reduction. They are asking themselves, ‘Do we really need this space?’” Landlords focus on occupancy In a balanced market, the vacancy rate hovers near 10 percent. Just three years ago, Orange County’s booming economy produced one of the tightest office markets in the nation. Vacancies closed in on 6 percent; rents spiked 12 percent in a year. Landlords held the upper hand in lease negotiations. It has boomeranged back. By the end of 2009, some brokers forecast that one in five offices will be vacant; the current vacancy rate is 17.3 percent – up from 14.9 percent a year ago, according to Grubb & Ellis. Kurt Strasmann, executive managing director of Grubb & Ellis’ Orange County and Inland Empire offices, says it could be more than a year before the situation improves. The health of the commercial market is tied to job growth, and most forecasts call for rising unemployment. “We’ll have to burn through the job losses before there’s stability,” Strasmann says. Add a tight credit market to the mix, and landlords with loans coming due face an especially challenging short-term future. What should they do? |
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