Top executives from leading commercial real estate companies in Southern California discussed industrial, apartment, office, retail, and capital market sectors at the CSUF Real Estate Land Use Institute’s Forum on Feb. 9.
The Forum, “Commercial Real Estate 2012: Where We Have Been, Where We Are and Where We Are Going,” at the Westin South Coast Plaza in Costa Mesa was moderated by Pat Donahue, chairman and CEO of Donahue Schriber. Panelists included Keith Eyrich, chairman of retail properties at The Irvine Company; Douglas O’Donnell, president and CEO of The O’Donnell Group; Scott Sanfilippo, partner at Greenlaw Partners; Geoffrey L. Stack, principal at Sares Regis Group; and Allen Staff, market president – region executive at Bank of America.
Panelists agreed that the recent downturn has been tough but the market is improving since having bottomed out in about 2009. Financing commercial projects was difficult in the downturn. Banks would not give out loans in 2008 and 2009, the panelists said.
“It’s amazing how quickly capital dried up,” Stack said. “But today, you have banks lining up. People want to do deals, particularly with multi-family units.”
Donahue said that capital was scarce at that time but opportunity was there. “Our best deal we ever did was in the meltdown.”
The apartment market started to drop after 2007, Stack said. Rents dropped 15-20%, he said, but now rents have come back to 2007 levels. Rents are up year over year.
“You manage to your occupancy,” Stack said. “We price our units every day. We had to drop our rents during the downturn.”
Now, the trend is towards more “green” projects.
“It’s becoming more crucial in all cities – for multi-family and industrial – that we build ‘green,’ Stack said. “It makes it less expensive for our residents to rent and they like that. They are willing to pay more. It’s the same thing for commercial tenants. It’s becoming more and more a thing of the future.”
During the downturn, Sanfilippo was with Crown which had office products in Southern California and Phoenix. He said the “worst of the worst” was Phoenix where vacancy went from 10% to 40% in a 12- to 18-month period.
“When vacancy gets above 35%, the bottom drops out,” Sanfilippo said. “Lease rates of $26-33 a foot dropped to $5 or 10 a foot which is a zero net deal. In Phoenix, there was no tenant activity for an 18-month period. Everyone held their breath.”
“This is the first year since 2008 where we are not anticipating rents to drop significantly,” Sanfilippo said. “Things stopped getting worse.”
Sanfilippo said his company is focused on buying quality office buildings.
“Most of what we are buying now is typically 60% occupied or less,” he said. “Some are 100% vacant. We’ve been buying all cash.”
“Then it’s a matter of going into other buildings and stealing tenants,” he said.
Retail has its own unique concerns. With many consumers shopping online, shopping malls have to be compelling places to go and spend time and money. Malls are becoming more of an entertainment center.
“(Previously) you couldn’t do a movie theater deal in place with a supermarket because they are ‘parking hogs.’ Eyrich said. “But now all those same retailers desperately want those “activity generators” like theaters and restaurants. Shopping centers are becoming compelling places to go and be. There is a sense of place that you have to create. Now the demand for it is stronger than it has ever been. You have to provide multiple reasons and things to do.”
When the Irvine Spectrum, which is owned by The Irvine Company, opened in 1995, it was a pure entertainment center. There was a huge movie theatre with focused retail and restaurants. Then Nordstrom and Target came in. Now it is two-thirds retail and one-third food and entertainment, said Eyrich.
“You need to have people coming at all times of the day and at all days of week,” said Eyrich. “Retail is all about tenant mix, how they fit and how successful those businesses will be in driving traffic and sales. We focus on that every day.”
Some of the general concerns the panelists expressed included financial market hysteria and consumer credit card debt as well as politicians – both Democratic and Republican – who are too focused on their reelection.
“There is a lack of leadership in Washington,” O’Donnell said. “It seems that everyone on both sides of Congress and Senate and the president are all acting to get reelected as opposed to what’s in the best interest of our country.”