ROBERT J. DUNHAM : Real Estate, Down the Road : Top Consultant Ventures a Guess About Future Trends
Robert J. Dunham is president of Newport Economics Group in Newport Beach, one of the county’s oldest real estate consulting firms. Dunham started the firm in 1972 after leaving the Irvine Co., the huge landowner and developer, where he also did market research.
A University of Arizona graduate in business, Dunham worked for a developer in that state until 1966. That same year he first visited Newport Beach. “I began to wonder why anybody in their right mind would live in Arizona in August,” he says. He went to work for the Irvine Co. the same year.
Consultants such as Dunham are the people the developers call when they need to size up a market. Consultants help them decide what sort of buildings to put up and how big to build them.
Dunham’s company consults for both home builders and commercial developers who build factories, hotels, offices and stores. One of his recent consulting jobs was for a David Rockefeller-led partnership that is planning to build two office towers and a hotel in Anaheim.
The commercial real estate market in Orange County--as in much of the rest of the nation--isn’t in great shape. There are so many office buildings that even though demand remains high, landlords are having a tough time getting reasonable rents.
Dunham, 59, lives in Newport Beach. In a recent conversation with Times staff writer Michael Flagg, he talked about some trends in the local real estate market.
Q. As we’ve all heard, the supply and demand for offices has remained fairly constant over the last few years. There’s been a lot of demand, but the problem is there have been even more buildings constructed. Do you see that changing?
A. Not really. What’s changed a little bit is, the volume of construction has gone way down. So if you look out 12 months--and I know we’ve been saying this every year, but this time it’s true--the supply-and-demand ratio is going to be a lot more positive, barring some really major calamity that comes out of events in the Middle East that could hurt demand. And everybody knows we’ve been riding really close to a recession for a long time. (The commercial building market) has been at 20% vacancy a long time. Because of some of these buildings having sat there a long time, the rents are lower than they were seven years ago.
Q. What’s that mean for the owners?
A. You can imagine what that does to the value of the buildings around here. The only thing is, nobody’s selling. If the value of your property is extremely low but you don’t have to sell, you’re not going to run out and sell it. In fact, I can’t think of a sale of a major office building recently.
Q. The owners of one of the last big buildings to sell, the Atrium near John Wayne Airport, made a to-do about the helicopter landing pad on the roof of their building. You don’t seem to think much of these giant health clubs and the other stuff developers are doing to get tenants in the building, do you?
A. Well, maybe I’m a little biased because I’ve done so much work on those things and interviewed so many tenants. I mean, people have suggested everything from bathrooms in offices to jogging trails around the parking lot to tennis courts, swimming pools, Jacuzzis, balconies outside the offices, fireplaces in the offices, and on and on. And invariably those things don’t rank very high. What do people want? Well, first they want reasonable rents and good management. Good management ranks very high.
Q. What about this slowdown in construction? A lot of people say they can’t talk their bankers into loaning them any money.
A. It is a capital-driven situation. If you loaned the building industry all the money it wanted, you’d have high-rise towers from here to New York and back. What you’ve got are formerly irrational lenders pulling back, and of course, in the case of banks and thrifts, they’ve got the federal government behind them telling them to do so. There was so much money to do these projects at one time. The real rate of return, however, keeps getting lower and lower.
Q. Well, I guess if you’re in business to build, you build, right?
A. This push to build is corporate-driven, too. You have these huge companies like the Koll Co. and the huge home-building firms that either build or what are they going to do? You either lay off everybody and close the doors, or you try to keep going and adapt to the times. Koll, for instance, has cut way back on building and is trying to get a lot of buildings to manage on a fee basis, which isn’t as exciting as what they were doing before. But it’s a way of staying in business. The big home builders are really kind of stuck, though. You can’t easily change what you’re doing, so you lay off people, stretch out your projects and you don’t make much money for a while.
Q. Are the types of office tenants changing at all?
A. The only change is that they’re getting bigger. They see this as being a bigger and more important area now, particularly around the airport, where most of the offices are. So you start getting AT&T; Security Pacific Bank takes a whole building; IBM is going to have a huge building over near South Coast Plaza.
Q. Is the airport area going to end up being a lot more like a traditional downtown because of the apartments and condos they’re planning to build among the offices?
A. Sure, because that’s the way it was done a hundred years ago in Europe, and it works. You had the guy who had the meat market and he lived upstairs. The whole idea is bringing people closer to the jobs. (Nearby) Irvine, for instance, has no Main Street. It’s huge and it’s all sorts of homogenous, upscale residences with shopping centers here and there. There’s no center to it.
Q. A place like Newport Beach, on the other hand, has all these quaint little neighborhoods like the Balboa Peninsula and Corona del Mar.
A. Yeah, I think that’s missing in Irvine. There’s no variety to it. You drive and drive and it blurs after a while. It all looks the same.
Q. Well, you were at the Irvine Co. when a lot of that planning was going on. Why do you think they did it that way?
A. Well, there were different generations of thought over there. If you look at some of the first neighborhoods on the bluffs (overlooking Newport Beach’s Back Bay), they’re magnificent. There are only three (residences) to the acre, and they’ve got huge greenbelts and flowers; they’re very attractive. The first developments in Irvine, say at Turtle Rock, are very elegant compared to the way we build today.
Q. So what happened?
A. Over time, the economics, the taxes and the change in the company’s ownership led to more high-density development. When the company was controlled by a foundation early on, they didn’t really care about earnings. Once it’s owned by somebody like (Irvine Co. Chairman Donald L.) Bren, the whole picture changes; they can’t afford to be quite as elegant as they were before.
Q. Do you think that’s likely to change?
A. Somebody told me the other day that they’re going back and looking at some of this stuff and saying, “You know, maybe we should go back and do things a little more like we used to. Maybe we’ve gone too far.” Some of their high-density projects go on and on. I often wonder whether if you had had a few too many drinks, would you ever be able to find where you lived? Maybe I’m a bit of a snob, but it doesn’t have any character. It’s clean and tidy and nice, but it has no character.
Q. The ironic thing to me about a city like Newport Beach is that none of those charming little neighborhoods were really planned to be that way.
A. Sure. How many Balboa Islands are there in the world? You’d have to go to the East Coast, some place like Nantucket (Mass.), to find anything like it.
Q. And yet Orange County is tending to look more like suburban Fairfax County, Va., near Washington, which looks like suburban Dallas and so on. Is there really any difference between the county and some of these other places?
A. They’re all part of the same trend. Everybody talks about “Orange County,” and where else in the world do people talk about counties, or know what county a city is in? Who knows what county Dallas is in? You don’t think about it. The reason we think about it is like that old joke Bob Hope used to have about Los Angeles: “Seventy-six towns in search of a city.” Same thing here; you’ve got 20-odd cities in search of an identity.
Q. To change the subject, what’s going on in retail?
A. The big thing these days is power centers, and they’re designed specifically for what the building trade calls big-box retailers: the Home Clubs, Home Depots and Price Clubs. They’re in huge buildings, do phenomenal businesses and the types of retailers that locate near them are lower-priced, high-volume operations like T. J. Maxx and Toys ‘R’ Us.
Q. Seems like an odd thing to put in the middle of some of these new upscale neighborhoods.
A. It is kind of a contradiction. We’re working on a town center development in an area that’s kind of affluent. You can’t suggest they build a small Fashion Island. For one thing, the department stores are in disarray and their stores are too big. So what you get instead is this huge, boxy store amid a sea of parking. The parking ratios are probably double a lot of shopping centers because of the tremendous volume the stores do. Most cities require four spaces per 1,000 square feet of store space. A lot of these centers have six and seven spaces per that much space. It doesn’t make for a very attractive setting, but it sure works.
