Pretty Vacant - Commercial Real Estate On The Move?

Park.jpgSongbird Office Park is quiet. No pedestrians stroll its meandering courtyard walks, few cars populate its freshly tarred parking lot, and its tiered fountains sit dry. The 31 office buildings here in Newbury Park, Calif., finished in a "neo-eclectic" style with stucco and stone, are mostly empty—commercial real estate still for sale.

Ventura County-based Bollinger Group began construction on Songbird in 2002, when the rapid expansion of small businesses fueled a commercial construction boom. When the park was completed in 2008, the credit crunch prevented a widely anticipated small business expansion. Consequently, these office spaces went unsold for nine months.

"The initial interest was good and we sold seven or eight buildings before the park was even completed," said Joe Yakubik, the broker representing Songbird Office Park. "But then construction took a bit longer than expected and the economy collapsed."

Early this year, commercial real estate in Ventura County was identified as another victim of the recession's ravaging appetite. Not only had construction slowed drastically, with the issuance of new commercial building permits dropping more than 50 percent in many cities (Camarillo issued 26 permits in 2007, and only seven in 2009), but vacancy rates soared to 18.9 percent—the highest in the decade—as foreclosures increased and the clientele for newly constructed, built-during-the-boom commercial properties disappeared.

Yakubik said he and his business partner never thought it would get so bad.

"During the boom [2002 - 2006], you could go a couple months without selling a building—but you were making so much money, it didn't matter," said Yakubik. "It took me about six months to realize it was really over."

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Songbird has seen prices in the park drop from $375 per square foot in 2008 to $310 per square foot currently. Every aspect of the recession contributes to this pricing.

"Construction was more expensive a few years ago—materials, laborers, contractors," said Yakubik "Now, people are begging for work, it is cheap to build, and businesses are staying put to save money."

Yakubik said the commercial boom was fueled by a perceived need for more new spaces. As small businesses grew, they were enchanted by the idea of expanding to brand new offices. Developers were outdoing each other with fancier park amenities, better outside spaces, and flashier materials, pushing the cost of construction up to $400 per square foot in some cases.

At Songbird, getting a buyer was easy because there were so many—but the trick was to keep them. They loved the park because of the amenities and location but were easily distracted when the space wasn't immediately available, said Yakubik.

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Still, the businesses that did move in are surviving the economic downturn. A doctor, a dentist, several lawyers, and a church now occupy the quiet office park, and clients are never at a loss for parking.

"Of course foreclosure affects the value of the property as a whole," said Yakubik. Songbird has not yet had an owner go through foreclosure, which is a good sign in this market and helps with the pricing of the 17 buildings still for sale, he added.

In Ventura County, hundreds of office parks have lost owners, and both the businesses that had purchased space and overzealous developers who failed to sell any part of their new properties have been confronted with the dreaded f-word.

While this is bad news for the affected parties, others see opportunity.

"A ton of property is changing hands right now, so that's all I care about," said Realtor Denny Bloom.

Bloom said he prefers to be a listing agent, which means he solicits the seller to represent the property rather than taking buyers out to see potential acquisitions. And in Bloom's opinion, there are great days ahead for him.

"I was telling people to sell in 2006," said Bloom. "This is the third recession I've been through and though you can't time a market, prices were just unsustainable."

Bloom was selling a bank-owned office building in Westlake Village for $394 per square foot. Two years ago the space was selling for $600 per square foot.

"Within the next 12 months, 70 percent of my listings will be bank-owned," said Bloom. "Three years ago, that number was zero."

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Despite the consistent up-trend of foreclosures and vacancies, Yakubik said he thinks the market has almost hit a plateau. Though prices have remained low, Songbird has sold five buildings since the beginning of the year.

Yakubik said it is just a numbers game. He has advertised the cost of owning a building at $1.05 per square foot per month, compared with an average asking rental rate of $2.33 per square foot per month. The U.S. Small Business Administration's 504 loans are some of the cheapest in history, so if a business does have the capital, right now is potentially a good time to buy, said Yakubik.

Yakubik and others with commercial property to sell are looking to lower prices, good financing offers and the promise of an economic recovery (even if it is slow) to encourage sales.

"I truly think we can sell out this year," said Yakubik with an optimistic smile. "And by the end of the summer, we'll be able to raise prices again."

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Eventually the bubble hits everyone. Residential sales were just the beginning. A recession hits nearly everyone.

Big Mike
CEO of Santa Ana Inmate Search