Continuing a downward trend in California’s commercial real estate market, New York-based investment management firm Blackstone sold two 13-story office towers in Santa Ana for an estimated $47 million loss in March.
Barker Pacific Group, a Los Angeles-based real estate management and development company, and Kingsbarn Realty Capital, a private equity firm in Las Vegas, joined forces to purchase Griffin Towers office park for $82 million ($146 per square foot), a 36 percent discount from the $129 million ($230 per square foot) Blackstone paid in 2014.
“Griffin Towers is an excellent fit to our office portfolio, which now includes eight properties totaling more than three million square feet,” Michael Barker, principal and managing director of Barker Pacific Group, said in an April 6 statement. “The property offers a great location to the major freeways, John Wayne Airport, and a neighborhood of diverse amenities.”
The Class A facilities include approximately 560,000 square feet of office space, with a multi-story parking garage and premium on-site amenities including fitness and conference centers.
Public records indicate the most recent sale equates to the lowest-ever valuation, surpassing the $89.9 million low in 2010 following the financial crisis in 2008. The building had previously sold for $183.8 million in 2007.
“While there are market challenges for owners of office buildings, we believe in the future of high-quality office environments with great locations and robust amenities which Griffin Towers offers its tenants,” Mark Handin, partner at Barker Pacific Group, said in a statement April 6.
Built in 1987 with towers located at 5 and 6 Hutton Center Drive, the sale is the second on the street to suffer significant losses in valuation this year, following the liquidation next door at 4 Hutton Centre Drive for $24.9 million in February. The latter property was previously sold for $55 million, according to county records.
“There is a massive bifurcation in real estate performance, and what you own matters, which is why U.S. traditional office represents only [about 2 percent] of our portfolio today versus nearly 50 [percent] in 2007, and why our global portfolio is [about 80 percent] concentrated in industrial, rental housing, hotels, lab office and data centers – sectors with exceptionally strong fundamentals,” a Blackstone spokesperson said in a statement to The Epoch Times.
In another instance of a price drop in Southern California’s office real estate market, Union Bank Plaza in Los Angeles sold at less than half the expected asking price in March. A deal was consummated for $110 million, after a reported $165 million offer fell through earlier this year, with the building last bought for $210 million.
Several factors are pressuring the office market, analysts suggest.
“There are a lot of things going on, with interest rates going up and vacancies increasing because people are working from home,” Jerry Holdner of Avison Young, a global commercial real estate firm headquartered in Toronto, told The Epoch Times.
“Companies are saving money on real estate expenses because they need less square footage,” he said.
Pressure on commercial real estate valuations accelerated during the pandemic, according to local real estate experts. “There weren’t many conversations about working from home before the pandemic,” Holdner said.
The move toward remote and hybrid work environments facilitated the decline in demand for office space, as evidenced by the increase in vacancies and decrease in sales prices over the last three years.
Square footage for office space under construction for the county has plummeted from a year ago, with 190,000 square feet currently being built, as compared to 1.3 million in 2022, according to Newmark.
The county experienced double-digit vacancy rate declines overall, but some regions fared better than others. Aliso Viejo’s 34.7 percent was the highest in the county, while Fullerton’s 6.3 percent was the lowest for any area with more than 1 million square feet of inventory. The northern part of Orange County—encompassing the Anaheim Hills, Brea, Fullerton, La Habra, Placentia, and Yorba Linda—represents the strongest office market, with a vacancy rate of 11.2 percent.
Irvine offers the widest selection of office space, with more than 23 million square feet of inventory in the city, and a vacancy rate of nearly 20 percent, as reported by Newmark.
The industrial sector has fared much better, with a reported vacancy rate of 1.7 percent across the county, according to Newmark. Real estate analysts point to the difference in business models, where industrial workers are less likely to work remotely, and a move toward repurposing industrial square footage into affordable housing units.
Southern California’s office space market is not unique, as major municipalities across the state are experiencing declines, with the San Francisco Bay Area dropping more than 30 percent over the last two years.
Similar conditions exist nationwide, with New York City’s commercial sales falling more than 50 percent since last year, according to data reported by Avison Young.
With the commercial real estate market at a crossroads, according to analysts, the future of the industry is uncertain. While some anticipate a turndown that could significantly impact financial markets, with rising interest rates hampering refinancing attempts and increasing borrowing costs, others suggest there is a path forward that does not include a system-wide crash.
“There will be really good opportunities for people that can afford it,” Holdner said. “If you buy a building with cash, you’re going to be in pretty good shape.”
