Commercial Real Estate in Irvine

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PANDA_IHB

PANDA_IHB

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Does any know much about the Koll Center development of commercial properties? What exactly does a Industrial Flex Space mean? I know that on average residential real estate in Irvine has come down on average of 20% from the 2006 peak, does the same apply for commercial real estate in Irvine? By how much would the current office space below be overvalued if the Price/SF is $320.00?



Koll Center 3 Bldg. 7B



http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=15223941&StepID=101&RecentlyViewed=true&ItemIndex=4&PgCxtDir=Down



I am trying to learn a little bit about the commercial real estate in Irvine.



Panda

"Sorry BK and Graph for asking so many questions. I think I already used up my two questions for the week." :)
 
[quote author="PANDA" date=1216627608]Does any know much about the Koll Center development of commercial properties? What exactly does a Industrial Flex Space mean? I know that on average residential real estate in Irvine has come down on average of 20% from the 2006 peak, does the same apply for commercial real estate in Irvine? By how much would the current office space below be overvalued if the Price/SF is $320.00?



Koll Center 3 Bldg. 7B



http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=15223941&StepID=101&RecentlyViewed=true&ItemIndex=4&PgCxtDir=Down



I am trying to learn a little bit about the commercial real estate in Irvine.



Panda

"Sorry BK and Graph for asking so many questions. I think I already used up my two questions for the week." :)</blockquote>
As someone who works in the commercial real estate industry, I'll try to answer your questions. The Koll Center development is a large office complex over in Irvine. Industirla Flex Space is space generally anywhere from 2,000sf to 20,000sf +/- for smaller business users where there inside of an industrial style building (usually one-stroy that's anywhere from 20-25 feet tall) that has an office component (usually 10-30% of the total space). Commercial real estate does not directly move like residential because buyers and sellers tend to be more sophisticated and there is little to no emotion involved in making development decisions or sales/purchases. The primary factors in the pricing of commercial real estate are the level of rents, occupancy of the building/market, credit of tenants, lease rollover risk, and the cost of financing. Price is determined by the current NOI or stabilized NOI divided by a Cap Rate (return on cash). PM me or post up any other questions that you may have.
 
Trojan,



I am curious to how commercial real estate is financed? Is it similar to residential real estate where you put down 20% and mortgage 80%? Are the mortgage rates the same as residential or higher? Has commercial real estate prices fallen as much as residential real estate prices has in Irvine? What part of Irvine would you recommend to look, where can one find some of best bargains with a motivated seller for spaces between 2500 - 5000 square feet (20-30% office space and 70-80% warehouse). What are the vacancy rates like these days and has rent come down a bit from 2 years ago?



Thanks.

Panda
 
Panda,

I can't really answer if commercial has fallen as much as homes, i would say it just depends upon where you are looking. As far as financing, there are alot more options, but you need to come up with more cash up front (of course you need to "Prove" a stable business model). The last deal I saw we put up 38% to make the a CAP rate of 6-8%. From what I understand, the vacancy rates are higher than previous with some opportunity for negotiation (again, dependent upon where you are looking). The down side is you'll need to come up with more cash up front. I work with rentals/apartments, not much warehousing though. (TrojanMAN!! is our guy... )



-bix
 
[quote author="biscuitninja" date=1216642436]Panda,

I can't really answer if commercial has fallen as much as homes, i would say it just depends upon where you are looking. As far as financing, there are alot more options, but you need to come up with more cash up front (of course you need to "Prove" a stable business model). The last deal I saw we put up 38% to make the a CAP rate of 6-8%. From what I understand, the vacancy rates are higher than previous with some opportunity for negotiation (again, dependent upon where you are looking). The down side is you'll need to come up with more cash up front. I work with rentals/apartments, not much warehousing though. (TrojanMAN!! is our guy... )



-bix</blockquote>
Bix, you are gonna make me blush...;)
 
[quote author="PANDA" date=1216633426]Trojan,



I am curious to how commercial real estate is financed? Is it similar to residential real estate where you put down 20% and mortgage 80%? Are the mortgage rates the same as residential or higher? Has commercial real estate prices fallen as much as residential real estate prices has in Irvine? What part of Irvine would you recommend to look, where can one find some of best bargains with a motivated seller for spaces between 2500 - 5000 square feet (20-30% office space and 70-80% warehouse). What are the vacancy rates like these days and has rent come down a bit from 2 years ago?



Thanks.

Panda</blockquote>
There are two different types of real estate loans...



1) Investor commercial real estate loan (when the owner at max will occupy 25% of the space). With this type of loan, you can go to a bank, an insurance company, or a private lender (eg GE Capital) to finace the purcahse. Depending upon the property type being financed and the appraisal (to determine a stabilized NOI), lenders will lend from about 65-75% of the purchase price.



2 Owner occupied commercial real estate loan (where the owner occupies more than 25% of the space). In this case, you would either get a business loan from a bank or you can get an SBA from a bank. I'm not 100% certain about the financing stuctures on owner occupied purchases because I don't deal with that, but the lender would be underwriting your business more than the cash flow of the property and I think the max LTVs are 75-80% (don't quote me on that though).



Depending upon the lender, most commercial real estate loans are based upon a corresponding treasury rate plus a spread. So if you want a fixed 10-year loan (with a 25 or 30 year amortization), the quote will be 10-year treasury plus at least 2.50% or more in today's market plus a 1% origination fee. However, be aware that most longer term fixed rate loans will have a prepayment penalty and/or a defeasance (yield maintenance fee) because there lender is passing on the interest rate risk to the borrower. Also note that closing costs for commercial real estate loans are significantly higher than they would be for a residential mortgage loan (legal, appraisal, phase 1, soils report, and other due diligence costs).



Commercial real estate prices have not fallen much, if at all, in Irvine so far. That's not to say that prices may not fall, but current there are large bid-ask spread (asking prices by sellers vs. offer prices by buyers). The property is that financing has tightened up a bit so it may push up Cap Rates which will decrease prices if the cash flows of the properties remain constant. The biggest factor of the cash flow of the properties are the underlying leases so if vacancies in the property and market keep increasing, then the cash flow will drop which will decrease the price. Over supply (i.e. more construction versus lease absorption) will also raise the market vacancy rates.



In terms of the various property types, retail properties will suffer most in a housing downturn. Office, Industrial, and Hotel properties are general driven more by the macroeconmy and the business cycle. Right now, in Southern California Industrial properties are performing the best of all property types as they have the lowest vacancy rates. You can go to www.cbre.com to get general vacancy rates for the various property types, but then there are vacancies for submarkets and different classes of the property type that you'll need to get from someone who has access to that (commercial real estate brokers are the best source).



Which part of Irvine should you be looking at? Well, that all depends on where you want to be and what you want to be around. There might be parts of Irvine that have older properties that will command cheaper rents than the new stuff that's getting build by the Spectrum. Understand that rents have been increasing across the board for the past 10+ years and unless there's going to be a serious recession, don't expect rental rates to come down much, if at all.



Unlike residential sellers, you won't find many "motiviated sellers" in the commercial real estate sector because most developers that own the newer, large properties have deep pockets and will not fire sale properties. Your best bet would be to try to buy a property from another business owner that is selling their property either due to hard times or because they need to move to a big space.



Commercial real estate generally doesn't have the big highs and lows like residential real estate does because emotion is taken out of the decision procress and it's all analytical. In most cases, the smaller the space that you are looking to buy the more you can expect to pay per square foot.
 
<blockquote>Commercial real estate prices have not fallen much, if at all, in Irvine so far. Commercial real estate generally doesn?t have the big highs and lows like residential real estate does because emotion is taken out of the decision procress and it?s all analytical. </blockquote>


the oc commercial property mkt is among the worst of the top 20 MSAs in the country. employment growth, absorption rates, rent growth, and vacancy rates all look pretty bad relative to other markets.



here's a recent sale of office property (not industrial however) sale to consider.



maguire properties recently sold a complex of office properties on main and macarthur/von karman, very close to the koll plaza. the sales price was $347/sq ft which equates to a 4% cap rate. carry value on the books was $425/sq ft. lesser quality buildings in the area traded at $400/sq ft at the peak 06-07. so that's a 15-20% decline in value. outside of the irvine co, maguire is the largest landlord in the business district. they are hemorrhaging cash, underwater on a number of high profile properties in the area, and will probably hand back the keys on a number of them if they can.



no highs and lows, deep pockets, and no emotion-driven mistakes in commercial real estate? the credit-driven commercial real estate bubble is bursting as we speak.
 
[quote author="acpme" date=1216647172]the oc commercial property mkt is among the worst of the top MSAs in the country for obvious reasons. here's a recent sale of office property (not industrial however) sale to consider.



maguire properties recently sold a complex of office properties on main and macarthur/von karman, very close to the koll plaza. the sales price was $347/sq ft which equates to a 4% cap rate. mpg had carry value of $425/sq ft on their books and lesser quality buildings in the area traded at $400/sq ft at the peak 06-07. <strong>so that's a 15-20% decline</strong>.</blockquote>
That's a little misleading actually. It doesn't matter what Maguire had the complex valued on their books, in my book a 4% cap rate is VERY LOW, especially for office buildings outside of Manhattan. Why is it low? Well, because the buyer will not be able to find financing at a lower rate than 6-6.50% so that will cause negative leverage for the buyer. Sometimes properties are bought for really low ACTUAL cap rates (there's a difference between ACTUAL and STABILIZED cap rates) when there are huge vacancies or a significant amount of leases have below market rents. Also, what do you mean by the term "lesser quality buildings" in your statement above? Like A-class versus B-class buildings? I would definitely say that prices are somewhat down from 06-07 but that's just function of the tougher financing environment and increasing supply in the market because rents are slightly higher today.
 
i agree that the general consensus was that the low cap rate was based on 2 factors. assuming attractive fixed-rate debt is a positive. the other is high vacancy rate/potential for rent markups. the latter is sort of iffy because below avg rents can only be rolled up to market if they can be leased. i'm probably more bearish on the oc economy than most. the mortgage debacle has already turned many class-A bldgs into ghost towns. and the business district has the worst possible mix of tenants a landlord could imagine right now. whats left of the mortgage industry, home-builders, and regional banks. there's little potential for vacancy rates going down but more likely they're going up. i'm talking class-A bldgs here. even though vacancy rates in oc are 11% on avg, maguire has 30% vacancy rate on their oc properties. when the 2nd largest landlord in the area has that kind vacancy rate, it doesn't bold well for the direction of rents. the debacle of maguire is bad news for everyone in the area.



home prices are down from 06-07, also a function of tougher financing and increased supply. that has been terrible for the residential mkt, yet for the commercial mkt those are "but that's just..."?



i like the maguire example because they:

1) are the largest publicly-traded landlord in LA/OC (so we have public information and investor sentiment avail), and

2) bought a number of properties in the area just a yr ago and are now trying to sell them (providing a perfect comp for prices at peak vs today.)

3) clearly disprove the idea that billion dollar corporate landlords and developers do not make commercial RE mkts smarter or less prone to downturns.



so what happened? maguire acquired 24 properties from blackstone a yr ago and paid $2.9 billion for that portfolio. they have managed to sell off just a handful of those properties and are desperately trying to unload more to avoid going under. their stock is down 70% from last yr and the company now has a mkt cap of $550 million. investors clearly think southland properties are more than just "somewhat down".
 
CBRE's chartpr0n on vacancies...



http://img702.mytextgraphics.com/photolava/2008/07/21/2007q4crevacancy-4b94idjq9.jpeg



http://img901.mytextgraphics.com/photolava/2008/07/21/cbreofficeq208-4b94hoee3.jpeg



I see a trend... do you?



I also read <a href="http://calculatedrisk.blogspot.com/">Calculated Risk</a>, CR makes me smart. Add in acpme, chart trends, and common sense... then me really smart when me say commercial is going to take it up the a$$ the next few years. Gawd forbid I post the jobs numbers here too. The professional and business services sector shrinking is not good for office space. And... to think CBRE is bullish with how they think "office"/"professional" jobs will be created in OC. Just another Kool-Aid drunk seller with an ulterior motive. Anyone who says commercial RE is more stable than residential RE is either a liar/too young/doesn't do research/killed that brain cell to know that is far... far from the truth.



I can dig up some posts from some of the commercial RE bulls here to prove whether I have been right or not. It might be funny to see how wrong they were back then.



#1 rule of IHB: Read what CR writes, CR knows the OC market, CR has seen many markets of OC, CR has been right on the money about the OC commercial market, don't go against CR.



#2 rule of IHB: See rule #1.
 
Irvine Co. grabs office tenants near record pace

<A href="http://lansner.freedomblogging.com/2009/02/21/irvine-co-grabs-office-tenants-near-record-pace/15283/">http://lansner.freedomblogging.com/2009/02/21/irvine-co-grabs-office-tenants-near-record-pace/15283/</A>
 
the biggest local landlord is leasing space at record pace... hooryay! :-)

more empty office space in OC is being absorbed... hooray! :-)

the FDIC is expanding their presence in OC in order to manage all the local banks that have failed. uh... hooray? :grrr:
 
Irvine Company is cutting down leasing costs significantly to close their deals. I know this first hand. They were asking for $3.35 FSG for the Pacifica buildings and lowered to $2.95 FSG (and that's just the listing rate), and these buildings are mostly empty still. Additionally, they are just reporting the bigger new tenants that have signed for extended terms with Irvine Co. Sure you have Flour, Blizzard, and FDIC coming onboard, but no one is reporting the number of empty buildings down by Technology Drive, Alton, and the smaller buildings in the area. With that being said, what you are also not hearing is the number of developers that are in trouble. Take a drive down Irvine Center and Bake and look at the number of empty buildings and warehouses owned by Bacchus Development, Koll Centers, and others. Irvine Co will always be fine, as their land acquisition cost is basically 0. However, watch out for the commercial developers on the outskirts of Irvine, and near by cities.
 
Just to add, I?ve heard that they offered very generous TI allowances to get companies like KPMG and others to relocate to their buildings.
 
[quote author="vicstah" date=1235447317]Irvine Company is cutting down leasing costs significantly to close their deals. I know this first hand. They were asking for $3.35 FSG for the Pacifica buildings and lowered to $2.95 FSG (and that's just the listing rate), and these buildings are mostly empty still. Additionally, they are just reporting the bigger new tenants that have signed for extended terms with Irvine Co. Sure you have Flour, Blizzard, and FDIC coming onboard, but no one is reporting the number of empty buildings down by Technology Drive, Alton, and the smaller buildings in the area. With that being said, what you are also not hearing is the number of developers that are in trouble. Take a drive down Irvine Center and Bake and look at the number of empty buildings and warehouses owned by Bacchus Development, Koll Centers, and others. Irvine Co will always be fine, as their land acquisition cost is basically 0. However, watch out for the commercial developers on the outskirts of Irvine, and near by cities.</blockquote>


Not sure who owns what, but I do know that TIC does sell some of their buildings as well as lease them. Last month <a href="http://maps.google.com/maps?q=100+discovery,+Irvine,+CA+92618">100 Discovery</a> was foreclosed on. Next week <a href="http://maps.google.com/maps?f=q&hl=en&q=9891+Irvine+Center+Drive,+Irvine,+CA+92618">9891 Irvine Center</a> is scheduled for the auction and so is <a href="http://maps.google.com/maps?q=18071 FITCH AVE, IRVINE, CA 92818">18071 Fitch</a>.



They can tout their big lease deals, but the greater airport area saw a negative net absorption of -825,119 sqft. in 2008, accounting for more than half of the total negative net absorption in OC of -1,568,109 sqft. Consider that if the FDIC's 200,000 sqft. never happened, then South OC (includes the Spectrum and 40 Pacifica) would have seen a positive net absorption of just over 20k sqft. for the year, and would have been negative in Q4 with -75k sqft. OC has seen a total negative net absorption of -2,456,902 over the last two years.



It's funny you mention Fluor, because after today they don't have the same need for space as they did a month ago. I wouldn't be surprised to see more space available over there with State Street and Fluor making the changes they have been making. Just go take a look at the parking lots, they used to be pretty full a few months ago, and now you can find a spot up close... no problem.
 
[quote author="graphrix" date=1235469221][quote author="vicstah" date=1235447317]Irvine Company is cutting down leasing costs significantly to close their deals. I know this first hand. They were asking for $3.35 FSG for the Pacifica buildings and lowered to $2.95 FSG (and that's just the listing rate), and these buildings are mostly empty still. Additionally, they are just reporting the bigger new tenants that have signed for extended terms with Irvine Co. Sure you have Flour, Blizzard, and FDIC coming onboard, but no one is reporting the number of empty buildings down by Technology Drive, Alton, and the smaller buildings in the area. With that being said, what you are also not hearing is the number of developers that are in trouble. Take a drive down Irvine Center and Bake and look at the number of empty buildings and warehouses owned by Bacchus Development, Koll Centers, and others. Irvine Co will always be fine, as their land acquisition cost is basically 0. However, watch out for the commercial developers on the outskirts of Irvine, and near by cities.</blockquote>


Not sure who owns what, but I do know that TIC does sell some of their buildings as well as lease them. Last month <a href="http://maps.google.com/maps?q=100+discovery,+Irvine,+CA+92618">100 Discovery</a> was foreclosed on. Next week <a href="http://maps.google.com/maps?f=q&hl=en&q=9891+Irvine+Center+Drive,+Irvine,+CA+92618">9891 Irvine Center</a> is scheduled for the auction and so is <a href="http://maps.google.com/maps?q=18071 FITCH AVE, IRVINE, CA 92818">18071 Fitch</a>.



They can tout their big lease deals, but the greater airport area saw a negative net absorption of -825,119 sqft. in 2008, accounting for more than half of the total negative net absorption in OC of -1,568,109 sqft. Consider that if the FDIC's 200,000 sqft. never happened, then South OC (includes the Spectrum and 40 Pacifica) would have seen a positive net absorption of just over 20k sqft. for the year, and would have been negative in Q4 with -75k sqft. OC has seen a total negative net absorption of -2,456,902 over the last two years.



It's funny you mention Fluor, because after today they don't have the same need for space as they did a month ago. I wouldn't be surprised to see more space available over there with State Street and Fluor making the changes they have been making. Just go take a look at the parking lots, they used to be pretty full a few months ago, and now you can find a spot up close... no problem.</blockquote>


The spot known as the El Toro "Y" at the tip of the Irvine Spectrum Target parking lot where the 405 and 5 freeway joined into one is the southern most boundary of TIC's building inventory. All structures south of there are privately owned by others built on land purchased from TIC or Irvine family from generations ago.
 
We had a retail business at Jamboree and Bayside Drive intersection which we sold about 18 months ago. Our rent was $4900 plus cam charges. I spoke to new new owner about a month ago. He said he renegotiated the rent down to $2400 plus cam charges with Irvine company. This tells me that they must be having high vacancy in commercial properties.
 
[quote author="nc_resident" date=1235524343]We had a retail business at Jamboree and Bayside Drive intersection which we sold about 18 months ago. Our rent was $4900 plus cam charges. I spoke to new new owner about a month ago. He said he renegotiated the rent down to $2400 plus cam charges with Irvine company. This tells me that they must be having high vacancy in commercial properties.</blockquote>




Surprised to hear that the Irvine Co. discounted the rent so much.

There?s quite a bit of push back on rent from retail tenants.

Figured they?d probably keep the base rent the same and not collect on the cam charges.
 
[quote author="tenmagnet" date=1235524808][quote author="nc_resident" date=1235524343]We had a retail business at Jamboree and Bayside Drive intersection which we sold about 18 months ago. Our rent was $4900 plus cam charges. I spoke to new new owner about a month ago. He said he renegotiated the rent down to $2400 plus cam charges with Irvine company. This tells me that they must be having high vacancy in commercial properties.</blockquote>




Surprised to hear that the Irvine Co. discounted the rent so much.

There?s quite a bit of push back on rent from retail tenants.

Figured they?d probably keep the base rent the same and not collect on the cam charges.</blockquote>


You would suspect, but if they are hemmoraging dollars from empty building woulden't it make sense to limit the loss? Unlike some businesses which lose money and RAISE rates in a down market..... Talk about shooting yourself in the foot.





-bix
 
[quote author="nc_resident" date=1235524343]We had a retail business at Jamboree and Bayside Drive intersection which we sold about 18 months ago. Our rent was $4900 plus cam charges. I spoke to new new owner about a month ago. He said he renegotiated the rent down to $2400 plus cam charges with Irvine company. This tells me that they must be having high vacancy in commercial properties.</blockquote>
How big was the space? 1,200sf?
 
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