Supply and demand. A basic economic principle first discussed in the seventeenth century by scholars such as John Locke, Sir James Steuart and Adam Smith.
This Adam Smithian see-saw has broad implications in the commercial real estate market. If supply exceeds demand, a buyer’s market ensues. Conversely, sellers win when demand exceeds supply.
Currently, Southern California is engulfed in a seller’s market largely because of this imbalance between available buildings – supply, and businesses looking to expand – demand.
Seldom discussed, however, are the reasons such an imbalance exists. Here’s a look at some of those reasons.
Lack of new construction
A spate of new construction would, in fact, cause the supply of available inventory to increase, resulting in a parity of demand and supply. But akin to fighting a wildfire with a water pistol, the thirst for supply will not be completely quenched with new construction.
So, with this shortage of supply, why haven’t we seen more building? The reasons are simple. Southern California has a lack of undeveloped land. Virtually all of the new construction we’ve seen in recent years has started with a site containing obsolete buildings that were razed to accommodate the new construction.
New construction is expensive. Land prices are a huge component of new construction — in some cases measuring half the cost — especially since the land includes old buildings that need demolition. The entitlement process is challenging. Cities and counties locally have extensive regulatory requirements in place which add months to the construction time of a new development.
A repurposing to housing
Many, many thousands of industrial square feet have been retired in favor of high-rise apartments and condominiums. Doubt what I say? Just take a look at the area surrounding Anaheim Stadium or John Wayne Airport. Formerly, those areas were home to local manufacturing and logistics businesses. Now gracing the skyline are three- and four-story buildings under construction, which will provide much-needed housing to stem another shortage — but at the expense of buildings where people worked and products are made and shipped.
Money is cheap
Companies can invest 10 percent of the purchase price of a building, finance the balance with a loan through the Small Business Administration, and with Eisenhower era interest rates, enjoy a payment that closely approximates a lease payment — but while owning. Many companies have taken advantage of this structure and the abundance of capital.
When will our markets return to normal – if you can define normal? Unfortunately, my crystal ball is as murky as the SoCal sky on a June morning.
Allen C. Buchanan is a principal and commercial real estate broker with Lee & Associates, Orange. He can be reached at 714.564.7104 or email@example.com. His website is allencbuchanan.com.
CBRE Group has sold an apartment complex in Santa Ana to an unnamed investor for about $13.8 million. The Regent, a 70-unit property at 1111 West Santa Ana Blvd. underwent a partial remodel over the past year. (Courtesy of CBRE Group)
Coldwell Banker Commercial Advisors in Irvine has arranged the $5.7 million sale of the two-story office building located at 3505 Cadillac Ave. in Costa Mesa. (Courtesy of Coldwell Banker Commercial Advisors)
Emile Haddad, chairman and CEO of FivePoint Holdings in Aliso Viejo, has been appointed chairman, effective July 1, to the Lusk Center for Real Estate advisory board at USC. (Courtesy of USC)
Bill Witte, chairman and CEO of Related California in Irvine has been appointed vice chairman, effective July 1, pf the Lusk Center for Real Estate advisory board at USC. (Courtesy of USC)
Ali Nelson has been named manager of investor relations for Aliso Viejo-based Nelson Brothers Professional Real Estate, which specializes in private student housing near major universities.
Dee Grace demonstrates her paddle technique on Morningside’s new pickleball court. Pickleball is one of the fastest-growing sports in the country, especially for older adults. (Courtesy of Morningside)
Wendy Bell takes to the Links at Morningside. Built at a cost of $1.6 million on nearly four acres of vacant land on the Morningside campus, the new golf course offers six holes as well as a practice hitting cage. The links were installed with artificial turf to make the course environmentally friendly and easy to maintain. (Courtesy of Morningside)
The Register has new details on the $133 million sale of the JCPenney distribution hub in Buena Park. Nicholas Chang and Richard Lee of NAI Capital in Irvine, along with Patrick J. Sullivan of NAI Hiffman and Brett Spitzer of NAI Global Corporate Solutions,, brokered the sale of the 1 million square foot industrial facility. The deal, NAI reported, was the largest contiguous single-tenant transaction in Orange County over the last 25 years. Chang, Lee, Sullivan and Spitzer represented both the seller, JC Penney and the buyer, Oak Brook, Ill.-based CenterPoint Properties.
CenterPoint plans to renovate the property and market it for lease as it becomes available. JCPenney has said it will lease back the center for about a year. The Register previously reported the expansive complex is divided into four 250,000-square-foot sections, which could create an opportunity for multiple tenants. The property was built in 1967, according to CoStar Group, a commercial real estate data provider.
CBRE Group has brokered the sale of an apartment complex in Santa Ana to an unnamed investor for about $13.8 million. CBRE’s Priscilla Nee and Dan Blackwell represented the buyer and the seller, an investor who purchased the property last April and renovated it to sell at a gain. The Regent, a 70-unit property at 1111 West Santa Ana Blvd. underwent a partial remodel over the past year. The buyer plans to continue the renovation plan and should be able to realize rent increases of about 30 percent once the property is stabilized. The property features seven studio units, five junior one-bedroom/one-bathroom apartments, 28 regular one-bedroom/one-bathroom and 30 two-bedroom/two-bathroom units.
Coldwell Banker Commercial Advisors in Irvine has arranged the $5.7 million sale of the two-story office building located at 3505 Cadillac Ave. in Costa Mesa. The 18,208-square foot building sold to an unnamed local investor. Michael Dorsey and Stephen Madigan with Coldwell Banker represented both the buyer and seller in the transaction.
Jeffer Mangels Butler & Mitchell has renewed its lease for 15,325 square feet in the Jamboree Center at 3 Park Plaza, Suite 1100, in Irvine as it celebrates the 10-year anniversary of the office’s opening. Founded in Los Angeles in 1981, the law firm opened its Orange County office in 2007 to serve its Orange County clientele, which includes hospitals, medical device manufacturers, financial institutions, business owners, investors and individuals. The Irvine Company is the landlord of the Jamboree Center; Travers CRESA brokered the lease. The lease renewal is effective June 1, 2017, for a five-year period.
Ladera Ranch-based Money360 closed more than $45 million in loans in April, the company announced. This brings the company’s total production to over $250 million in closed loans, with an expected $500 million in transactions by year’s end.
The loans included:
–$9.7 million bridge loan for a two-story, 198-room hotel property in Fayetteville, N.C.
–$7.7 million bridge loan for a multi-tenant, medical office building in San Jose.
–$8.5 million bridge loan for a five-story, multi-tenant office property in Orange County.
–$4.9 million bridge loan for a two-tenant, 19,107 square-foot anchored retail property in Ocean County.
–$6 million permanent loan for a one-story, 10-tenant retail property in Johnson County, Kansas
–$3.48 million permanent loan for a one-story, four-tenant retail property in Johnson County, Kansas
–$5 million permanent loan for an anchored retail center in San Bernardino County.
The company reports that in March it surpassed $200 million in closed transactions. It took Money360 more than a year-and-a-half to hit the $100 million mark, but less than six months to increase to $200 million.
The Morningside retirement community in Fullerton has opened a pitch and putt golf course and pickleball court. During the construction process for Links at Morningside, the management team worked with the California Department of Fish and Game and the Army Corps of Engineers to restore the land with thousands of trees, shrubs and ground cover native to the Fullerton area. Hundreds of weeds, shrubs and non-native plants were removed as part of the $100,000 habitat restoration project. Built at a cost of $1.6 million on nearly 4 acres of vacant land, the golf course offers six holes as well as a practice hitting cage. The links were installed with artificial turf to make the course environmentally friendly and easy to maintain. The community also completed a $2 million renovation of its onsite Lakeview Hall community room which now houses a professional stage and a game room.
People in real estate
Emile Haddad, chairman and CEO of FivePoint Holdings in Aliso Viejo, and Bill Witte, chairman and CEO of Related California in Irvine, have been appointed to key roles on the Lusk Center for Real Estate advisory board at USC. Haddad, as the new chairman, and Witte, vice chair, will help fill the role left by Stan Ross, who is retiring after 18 years as chairman. Their roles are effective July 1.
Ali Nelson has been named manager of investor relations for Aliso Viejo-based Nelson Brothers Professional Real Estate, which specializes in private student housing near major universities. Nelson will be the central point of contact for investors and will be responsible for the preparation and execution of investment documents. Previously, she was the director of operations and assistant director of client services at JRW Investments, a wealth-management firm in Pasadena.
Are the finances of Orange County homebuying out of whack?
At least by one measure, a home purchase’s financial hit to a typical household budget is nearing the insanity of the housing bubble of a decade ago. And these recent costs are even on par with the late 1980s housing boom, when inflation is factored into the equation.
A strong job market and a shortage of homes to buy has created rising home prices. Toss in higher interest rates and you get one estimate of recent homebuyers’ monthly payments at a nine-year high. CoreLogic says a typical buyer in March who financed their Orange County purchase would be paying $3,228 a month on the mortgage. CoreLogic arrives at the estimate by studying public details on each purchase mortgage made.
That’s a jump of $266 a month or 9 percent in a year. And it’s up $1,280 a month, or 66 percent, since the cyclical bottom in December 2011. (Yes, that was the time to buy!)
This recent jump in house pricing — and CoreLogic’s math includes newly built and existing single-family homes, townhomes and condos — is certainly a jolt to any house hunter’s budget. But it’s not unfamiliar territory for the Orange County market.
CoreLogic stats show between June 2004 and February 2008 this measure of homebuyer payments ran above March 2017’s level. But that era’s housing market — clearly overheated by easy lending terms — soon collapsed into the Great Recession.
Then factor inflation into the math. That makes housing costs in the middle of last decade look even sillier: One-third higher at that insanity’s peak vs. the latest costs. Ouch!
Curiously, when you look at inflation-adjusted mortgage payments back even further, you learn that 1989’s inflation-adjusted house payment for a buyer basically equaled today’s costs.
In those days, a booming local economy had a few dark clouds on the horizon. Unemployment had dipped below 4 percent, much like it has done lately. Plus, another similarity to 2017: a burgeoning local slow-growth movement threatened a needed supply of new residences.
Yes, the Orange County price tags looked leaner. The median selling price for all residences in 1989 peaked at $218,000. For March 2017, it was $665,000. Yet local paychecks were being stretched three decades ago, too. Orange County’s median household incomes ran around $40,000 as the 1980s ended. Today, it’s pushing $90,000.
Yes, home prices have essentially tripled. Incomes grew, but not as much. But I didn’t instantly recall this tidbit: the typical rate on a 30-year fixed mortgage 28 years ago was slightly above 10 percent. That is T-E-N percent. And some folks complain we’re now above 4 percent.
Three decades of inflation also has roughly doubled the costs of everyday goods. To jog your memories: In 1989, postage stamps were a quarter; gasoline ran about a buck a gallon, and a movie ticket would often cost you $4. Another “bargain” of that day: After the second stock market crash in two years, the Dow Jones Industrial Index fell to just above 2,000 in late 1989. It’s above 20,000 this month.
So, an Orange County buyer’s typical house payment in June 1989 was $1,679 — roughly half of 2017. But converted into today’s dollars to account for inflation, that payment translates to $121 more a month than the average payment this March.
Additionally, many late 1980s buyers took on added risks with the popular mortgages of the day. To save money, adjustable-rate loans were almost half of 1989’s financed purchases In March 2017, just 1-in-6 buyers used adjustable financing.
History reminds us that the late 1980s real estate upswing ended poorly, too. Aggressive lending by failing savings and loans led to overbuilding. U.S. defense-spending cutbacks, spurred by Soviet Russia’s demise, hit Southern California hard, eliminating numerous good-salaried jobs. Homebuying shrank as prices went limp, taking most of the 1990s to regain any serious momentum.
Orange County housing has been expensive for a really long time, and the affordability headaches created often lead to much suffering inside and outside of the ownership game.
Even in an advancing economy, housing’s no sure bet. So … is today’s market a just little out of balance or amid a mania that is overpricing deals and priming the market for another tumble?