The Wall Street Journal-20080130-Projects Stall in Orange County
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Projects Stall in Orange County
Full Text (994 words)Developers in a massive real-estate project in Orange County, Calif., are starting to shiver.
Mounting job losses, rising home foreclosures, construction costs and bad timing have caught some real-estate companies such as BRE Properties Inc. and Lennar Corp. flat-footed in Anaheim's Platinum Triangle, as the high-density urban redevelopment plan is called. Large-scale projects have been delayed or stalled, with some companies lowering return estimates on their properties.
Apartment operator AvalonBay Communities Inc. says it hopes the market will pick up by the time it finishes construction there in 2009.
The challenges at Platinum Triangle underscore the ripple effect of Orange County's real-estate problem beyond home foreclosures. Orange County is one of the epicenters in the U.S. subprime-lending crisis, given the region was a mainstay in residential construction and mortgage lending.
The subprime woes and slowdown in single-family housing have triggered thousands of real estate-related job cuts in the region, resulting in a slowdown in retail spending. This slowdown raises concerns that an abundance of available residential and commercial space will diminish interest in establishing new businesses and residences. The ramifications for large mixed-use developments in the region such as Platinum Triangle are profound.
"The deceleration of fundamentals in Orange County has probably delayed our ability to get to our original target returns by about a year," said Edward F. Lange, chief operating officer of BRE Properties. BRE Properties, an apartment real-estate investment trust, has built an apartment building in the Platinum Triangle called Renaissance at Uptown Orange.
During the fourth quarter, BRE Properties projected Renaissance to generate returns on invested capital between 7% and 7.5%, down from the 8% rate the company initially targeted.
"We have deceleration in Orange County, but we're still expecting positive market rent growth in 2008," Mr. Lange said.
The Renaissance is one of three projects that BRE Properties signed on for in the Platinum Triangle. While one property had a modest delay after BRE switched general contractors, the other was put on hold, pending market conditions.
BRE Properties isn't alone in grappling with setbacks.
"We are on hold at this point," said Ralph Deppisch, senior vice president of Steadfast Business Properties, a private real-estate developer that is planning a 20-story office building in the Platinum Triangle.
"At this time, it's best to wait and see. Hopefully, over the next six to 12 months things will clear up and we can move forward," he said. He added that they anticipated breaking ground in the first or second quarter of 2009.
"Initially, we were hoping to break ground in late spring of 2008. But we're about a year behind that schedule," he said, adding the firm has other, unrelated projects that have also been delayed because of the credit crunch.
The Platinum Triangle was approved by Anaheim in 2004. The development could include as many as 18,363 residential units and about 16 million square feet of office space. While a weaker economy, residential housing troubles and credit crunch are causing disruptions, real-estate companies and the city say they remain bullish about Platinum Triangle's long-term prospects.
"We continue to receive applications to develop in the area," said Sheri VanderDussen, the Platinum Triangle's planning director. She noted the project has well over 1,000 apartment units under construction.
"We expected the development to take a fairly extended period of time. It's totally market-driven," she said.
One of the main challenges for participating apartment REITs like BRE Properties and AvalonBay is tepid demand. Competition comes from an oversupply of apartment units including unsold condo buildings converted into rentals. Green Street Advisors' Apartment Revenue Model projects 2.5% revenue growth this year for Orange County. That is below the 3.1% forecast for the U.S. apartment market overall in 2008.
John Christie, senior director of investor relations and research at AvalonBay, said the firm has a 251-unit apartment building under construction at Platinum Triangle that is expected to be completed in the third quarter of 2009. Mr. Christie said AvalonBay anticipates there will be demand for rental apartments at that time as there continues to be a wide gap between housing and rental costs.
"I think there was an understanding of some of the risks that were involved," said Green Street analyst Haendel St. Juste. "But no one could have predicted the significant amount of job losses, the housing market [downturn] and competition from excess supply."
The weak employment and supply conditions forced BRE Properties to move its standard leasing concessions, or free rent, from one month to up to two months for Renaissance.
Meanwhile, Lennar, whose share price has fallen more than 70% during the past 52 weeks as it battles the housing bust, appears to have delayed development on two sites in the Platinum Triangle. The home builder has assembled about 40 acres of land for mixed-use projects in the area.
And while it has demolished buildings and installed infrastructure, it does not plan to request building permits within nine to 12 months, Ms. VanderDussen said.
Good timing helped real estate planner Phillip Schwartze, who runs the PRS Group, which is involved in a mixed-use development in the Platinum Triangle.
"All of the heavyweights are predicting we will be out of the recession by the time we are vertical," Mr. Schwartze said, referring to when his firm's buildings are up and operating.
"If you are in the ground right now or . . . doing construction right now, you would have much more difficulty," he said. "We're probably a year away from breaking ground. I know guys that got going when the cost of everything was extremely high. Maybe they didn't build the right product [or] overpaid for the land."
BRE's Mr. Lange said companies that develop and operate in Southern California fully expect that Orange County will recover. But such recovery may not occur until well into 2009.
"Once we get to a point of recovery, the recovery in market rent growth in Orange County will be substantially greater than the national average," he said.
