Timing the Orange County Real Estate Market – 6 Reasons to Buy an Office Building for Your Business
“Why didn’t I see that coming?’ This is what many business owners say to themselves when an opportunity has past them by. In a turbulent economy, when the future is unknown, there are always missed opportunities, causing company executives to postpone long term decisions, and it’s not until they look in the rear-view mirror that they realize they should have pulled the trigger. Each market cycle has its own unique aspects, but the result is generally the same – time is the main variable. With that being said, there are compelling reasons to believe that the timing is right for business owners to purchase a new building in Orange County.
If a company’s earnings are stable and its business plan has put it in a position to occupy the same size property for the next five years or more, purchasing a building could be the smartest business decision of 2010. As a result of the pricing in the market, the “lease versus own” scenario is coming back into alignment and buying a building is a smart investment choice once again.
For those businesses that fit these criteria, here are six reasons why now is the time to do so:
Reason #1: Prices have already declined in most markets by approximately 25 percent to 40 percent and buildings can now be purchased well below replacement cost.
The current sales taking place in the market are closing escrow 25 to 40 percent off peak values. In most cases, prices are back to their 2004 levels. Properties that have not sold linger due to sellers not being realistically priced in today’s market, but many of them are taking a harder look at their properties with an eye toward price reductions.
Replacement cost is a key component in real estate decisions and is a main factor for the most sophisticated real estate buyers. Buildings can currently be purchased well below replacement cost, allowing businesses to make the smartest investment possible.
Reason #2: There is excellent SBA financing available.
The SBA loan program has not been affected by the financial crisis, and the government is offering discounted fees. Businesses interested in purchasing a property can fix their occupancy costs for five to ten years at a record low interest rate (below six-percent). Not only is SBA financing inexpensive and easy to qualify for, but these loans only require 10 percent down.
If a business has the down payment for the property, it should qualify for this government-backed loan because there is an abundance of available capital and banks are interested in funding these comparatively low risk loans. These loans are preferred by banks because their portion of the loan is only 50-percent loan-to-value and is senior to a 40-percent government bond, making the bank’s risk relatively low. Many small businesses believe there is no money available for loans due to the current financial crisis, but banks continue to offer SBA loans to solid companies wanting to fix their occupancy costs. Also, for a short period of time, the government is significantly discounting the fees.
Furthermore, with inflation and interest hikes expected within as little as 12 to 18 months, the window of opportunity to secure favorable loan terms is now limited. Just one percentage point increase in the interest rate on a loan will have a significant impact on the total purchase cost, potentially amounting to tens of dollars per square foot. So don’t just focus on price. Look at the bigger picture!
Reason #3: The “lease versus own” scenario is back in line.
By buying a building, businesses can fix their occupancy costs for up to 10 years. As their own landlord, businesses will not have to speculate about future lease rates, when leases come up for renewal and owners raise rates to current market values. As the market has shown previously, lease rates will rise and landlords will have their day again.
Reason # 4: Orange County still has great fundamentals.
Orange County commercial real estate fundamentals for the long term are still very good and appreciation will return for owners who purchase space below replacement cost. As history has proven, as the economy recovers and rental rates increase back to record rates in the future, businesses that purchase their own building with fixed rate financing will benefit.
Reason #5: With a large inventory of buildings to choose from, businesses can find the right property and location.
With vacancy rates up and demand for space down, there are more buildings for sale to choose from. Buyers have the opportunity to locate properties with the exact features their businesses need and pay a lower price for them. In a market where sellers had the advantage, businesses were being forced to pay a higher price and compromise on quality. Today, buyers can get a superior price point on a building that better fits their needs.
The current market also allows businesses to negotiate the terms of the sale without the pressure of multiple offers. When the market was booming, properties were in escrow within 30 days, which did not allow sufficient time for negotiation. With today’s high inventory, buyers can now find the right building for their business needs at very favorable terms.
However, we expect to see stabilization in the owner/user office sales market in 2010 and are already see signs of less owner/user office buildings coming up for sale and a steady increase in buyer activity. As the inventory diminishes, so will the opportunity for businesses to buy a building that fits its exact needs.
Reason #6: Commercial real estate cycles typically follow residential and the residential market appears to have bottomed out in some sectors.
The residential market in Orange County appears to be showing signs of improvement, after establishing the bottom with prices that were approximately 40 percent lower than peak values in some submarkets. In these submarkets, residential prices have recently stabilized and are starting to creep higher.
3 important recommendations:
1. Allow plenty of time! The site selection, buying and loan qualifying process can take a long time. When contemplating such a long term commitment and substantial expenditure, don’t risk having to make short term decisions. We typically recommend clients to allow at least 12 months to complete the process to ensure the best results.
2. Hire an expert. If you are not intimately in tune with the latest market data, sale listings, off-market sale opportunities and sale comps and are not experienced in buying commercial real estate, hire a real estate broker to represent you. On most office listings the commissions are paid in full to the listing broker if you are not represented and the listing agreement prevents all or part of the fee from being renegotiated back into a purchase price discount. The benefits you receive from your own real estate broker representative will likely result in a reduction in cost several times the full commission paid if you’re broker is an expert in your marketplace/product type.
3. Don’t wait for the market to hit bottom. If you do, you’re too late. Most substantive data on market and submarket trends isn’t qualified and recognized as a definitive trend until 1-2 quarters after the fact. Learn the market and be proactive in order to time the market perfectly. We are already very close to the bottom!
4. Consider your options. Most of our clients want to buy. Most of them can’t. Most of them don’t realize this until they’ve spent months exploring buying opportunities. Don’t overlook leasing as an alternative. It requires significantly less up front capital expenditure and provides the operational flexibility for your business that a small building can’t afford. Today’s office leasing market offers plenty of opportunities for tenants to fix their occupancy costs at record lows for 5 years without having to buy.
For professional advice, market intelligence, a lease vs. buy analysis, financing options and scenarios and sale listings and off-market opportunities, contact Stefan Rogers at 949.263 5362 / srogers@voitco.com.
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