Real Estate / County Is Expected to Resist Slump of U.S. Building Industry in ’88

Experts forecast a slowdown in 1988 for real estate nationwide, but they say the industry will probably slow a little less in Orange County. One estimate, that of Chapman College’s Center for Economic Research, predicts that local building activity will drop about 6% next year.

In home sales, the county “is coming off a period of hyperactivity over the last two years,” said Ken Agid of the Marketing Department, a consulting firm. “Next year we’ll see a more normal market.”

And while the Construction Industry Research Board forecasts as much as a 14% reduction in office construction statewide next year, local experts say construction will not falter much in most of the county.

“And the demand for offices will actually be up a bit,” said Robert Dunham, president of Newport Economics Group.

What does all this mean to the average person?

In housing, there is some disagreement over whether more houses and condominiums will be built next year. Experts such as Al Gobar of Alfred Gobar Associates say developers will scramble to throw up more houses before a slow-growth initiative comes before voters next year.

Whichever way home construction goes, the price of a home--which has been increasing rapidly--should rise at a somewhat slower rate next year. That’s because the smaller pool of buyers who can afford the county’s high housing prices may be further depleted by late next year.

But the average single-family home is likely to remain beyond the reach of more than two-thirds of the county’s residents.

Excluding new homes, the median price of all houses sold in the county hit $176,595 in November. That surpassed even San Francisco, usually the most expensive housing market in the state, and raises questions about how the county is going to house its burgeoning population.

Those high prices are unlikely to drop soon, either, because land in the county is becoming scarce and expensive. That means the houses, too, are becoming more expensive.

“There are very few new single-family homes coming on the market for less than $200,000,” said Jeff Meyers of the Meyers Group, a consulting firm.

As the middle class flees high prices in the county, builders are following them to Riverside and San Bernardino counties, where cheaper land means cheaper homes are available.

So who’s left in the county to buy homes? Many of the buyers are older, more affluent people using the equity in their old homes to buy bigger houses: the “move-up” market, as builders call it.

So strong is the county’s economy that those people bought just about everything the builders put up this year.

“And the home builders have scrambled all over each other trying to see how high priced they can make their housing,” Gobar said.

At one point this summer, the supply of new homes for sale in the county reached its lowest point in 11 years, according to consultant Vic Cooper of the Marketing Department.

But that’s expected to change next year: Sales of new and older homes are likely to slow in the county. So are sales in the state and nation.

The California Assn. of Realtors has projected sales of older houses statewide to be down 10% this year. And chief economist Joel Singer said he sees no reason why Orange County should be different from the statewide picture, unless sales drop even more here.

“The county has very expensive housing, and so it really depends heavily on only one kind of market, the trade-up market,” Singer said.

The reasons for next year’s anticipated drop in sales: A slightly slower state economy, consumers’ declining confidence in the national economy in reaction to the stock market collapse and a realization by buyers that houses in the lower price ranges simply won’t be available, particularly in places such as Orange County.

Because of this anticipated slowdown, “home prices in Orange County will continue to go up next year but at a slower pace,” marketing consultant Agid said.

Meanwhile, there are several views about the supply side of the equation: Will builders put up more homes in the county than they did in 1987?

Permits for an estimated 9,300 single-family homes were issued by local governments in the county this year, according to the Construction Industry Research Board, down from 9,800 last year. Condominiums and apartments were up from 15,100 last year to 16,200.

Gobar and others, such as accounting and consulting firm Kenneth Leventhal & Co., think the number of new housing units will go up as builders race against the slow-growth initiative. Developers have already locked in some of their bigger projects in so-called “developer agreements” with the county; it is unclear how much the initiative--if it passes--would affect those agreements.

On the other side of the fence, the Chapman College Center for Economic Research’s annual forecast projects housing construction will drop again next year, falling about 8%.

Either way, so many county residents will stay out of the market and continue to rent apartments that landlords will ask for and get hefty rent increases at the better apartment complexes next year, one expert said.

“Most of the demand for (lower-priced) entry-level homes has been filled, even if those people had to move out of the county to find an affordable house,” said Michael L. Meyer, managing partner of Kenneth Leventhal & Co. in Newport Beach.

Apartment rents didn’t go up this year--the county average for a two-bedroom apartment is $750 a month, Meyer said--but with construction of apartments expected to slow, landlords will raise rents 5% or more this year in the better complexes.

So it is the county’s commercial buildings that will still be something of a bargain next year. More than 20% of the county’s top-notch office space is vacant, about the same as suburban office markets around the country.

Even though slightly fewer offices will probably be built countywide next year, there are already so many buildings with so much empty space that county tenants should find plenty of bargains.

Luckily for landlords, demand for office space has remained strong, though not quite strong enough: Concessions--such as more than a month’s free rent for each year of a lease signed, reduced rates on parking and generous allowances for tenants to customize their office space--are not uncommon.

A lot of the pressure to get tenants in the doors of the big office towers around the county came from the developers’ lenders, who usually insist that a certain portion of the building be leased before construction even begins.

But now that heavy pressure is lessening as fewer of the big towers are being built, said Robert Dunham, president of consulting firm Newport Economics Group.

Since tenants are still clamoring for space in some areas of the county, Dunham projected that the drop in construction will be less here than in the state and the nation and that local construction will actually increase in some areas.

At the county’s new “downtown”--the area around John Wayne Airport from Newport Center in Newport Beach to South Coast Plaza in Costa Mesa--office construction will actually rise slightly next year, Dunham said, as projects that were started earlier near completion.

At the end of next year, about 1.7 million square feet of office space will be under construction, contrasted with about 1.5 million this year. About half of the county’s top-notch office space is found in this area.

So where will the real leasing bargains be for businesses?

Next year they’ll be in store space, said John W. Bodenburg, a vice president in Irvine for Norris, Beggs & Simpson, a broker and property manager.

Note this figure: Permits issued for store construction in the county jumped this year to $272 million, from $225 million last year, the Construction Industry Research Board said.

“I think retail space is a little overbuilt now, and that’s where there’ll be a few more concessions,” Bodenburg said.

That’s next year’s real estate market. Looking beyond 1988, the biggest question is the Citizens’ Sensible Growth Initiative, which could slow construction of new homes and buildings if passed by county voters next year.

It is likely to pass, even its opponents concede, because county residents are increasingly frustrated with clogged streets and choked freeways.

What is not yet known, however, is how much the initiative would slow construction or, by extension, the rest of the county’s economy.

In the meantime, the developers are making hay while the sun shines, so building in the county should remain strong.