Thursday, October 15, 2009

Commercial Real Estate in Downdraft: Orange County Office Building Down 63% in Two Years

To measure the decline in SoCal office properties we need only look at the sale of 3 Macarthur Place, an 11-story 1991 building in Santa Ana, California.

Tishman Speyer bought the property in 2007 at the peak of the real estate market for $83 million. The building was just sold to Highridge Partners, a Los Angeles real estate investor, for $31 million, an astonishing 63% drop in 2 years. The building is 78% leased. [Los Angeles Times]

We are bearish on the Los Angeles office market at present for the following reasons:

  • There is already a glut of office properties in such key sub-markets as Santa Monica, Beverly Hills and Downtown Los Angeles. It will take years to absorb the vacant space.
  • Existing businesses are downsizing. There have been the greatest round of layoffs in a generation.
  • Demand for offices is waning. Increasingly, employees will telecommute and work mobilely. Lighting, heating/cooling, and cleaning spaces that will be occupied by employees for only a few hours a week is inefficient.
  • Downsizing of personal space. Sergey Brin and Larry Page at Google share a modest office. Businesses of the future will be mean, lean and leave the egos behind. Offices turn into cubes, cubes turn into common work spaces. Days of the four-walled office are numbered.
What are the hopes for offices? A good prospect would be mixed-use projects -- buildings that are converted partially into condominiums. If you're working 24-7, skip the freeway and take the elevator home. And if you forget your briefcase, have the doorman get it.