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Bill Halford of Bixby Land Company: Wait

January 8, 2009

There was a business journal article the other day discussing how tenants and buyers stand to gain from the slowdown in commercial real estate. The full article is here (although the article doesn’t really tell us anything interesting or new but I suppose it is something to write about in the absence of other commercial real estate news), but there was a quick quote from Bill Halford of Bixby Land Co. in the article which I found interesting:

Bill Halford, president and CEO of Irvine-based Bixby Land Co., whose 1 million-square-foot Silicon Valley portfolio is 98 percent occupied, had one word of advice for the spec developers at Moffett Towers in Sunnyvale and Riverpark Tower II in downtown San Jose: Wait.

“Those guys with empty spec space and very high asking rents will be hard-pressed to find occupancy in the near term,” he said. “But there’s no sense in diving on the grenade now and doing a seven-to-10-year deal that permanently devalues the property.

I agree with Bill on the first part of his statement in that there is very little near term demand, but I’m not sure I agree with him on his second premise. Sure, it would be nice to be able to wait, but remember that Jay Paul started marketing Moffett Towers back in 2005 even before construction started – they have been waiting.

In the face of a real estate environment in which demand is falling and rents are weakening, i’m not sure waiting will solve the problem. The reasons are threefold:

1) Landlords might have financing events coming up. In the absence of occupancy, they will be hard pressed to find any financing. Even if they get their projects to 50% occupancy they will still find it difficult to procure debt in this lending environment.

2) Rents will continue to deteriorate in the face of lax demand. All the leading indicators of demand for commercial real estate are down (same store sales, consumer spending, job growth, etc.), therefore rents will continue to fall further for at least the next 9-12 months.

3) Waiting increases your risk. Your risk-adjusted returns will likely be more if you sign some deals in this market than none. Most of these projects were built using proformas which are already out-of-date, therefore chalking up one to potentially two or more years of zero income will do more damage to the project’s IRR and increase the developer’s risk than deciding to at least get some deals done. I’ve seen the proforma for one of the projects Bill brings up, and I can say that both the rent and the exit cap rate are both not realistic in this market.

The reality is that not everybody can wait. It’s a nice luxury to have, but when you have interest payments and maintenance expenses that need to be made monthly without any income to offset those expenses, waiting becomes a very expensive game and undoubtedly it will prove too expensive for some developers out there.

Developers need to get in front of the problem. Otherwise they are just pushing a car without a driver as opposed to pulling a car without a driver. At least when you pull it, you will have some control over its direction and have a chance the car doesn’t veer off into a ditch.

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blacker January 8, 2009

I have been visiting your site for over a year now and appreciate your writing and thoughts. You have been spot on in many ways when commenting on information which has been floating around the market and economy, and I recall were ahead of the curve calling out recession and that much of the speculative development in the valley as being driven by hype in one of your posts a year ago. Keep up the good work.

real nippon January 8, 2009

I agree, keep up the good work. I have been working in the Japanese real estate market for several years now and its nice to get insights on what is happening in the real estate world on the other side of the world. thanx

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