New SoCal Office Building Sold at 40% Discount to Cost

Ouch! Maguire Properties, a beleagured Los Angeles real estate investment trust, just sold a brand new building in Irvine, Ca. for $160 million, about 60% of its construction cost.

The WSJ reports that the Emmes Group of Cos., a New York real estate investment firm, bought the property for about $300 a square foot. The estimated construction cost is $500 a foot. The property is currently about 60% leased. The deal was financed by EuroHypo AG with a loan of $125 million. EuroHypo was the construction lender on the building and had extended a $165 million construction loan.

An ironic note to the deal is that the original anchor tenant was to have been New Century Financial, one of the biggest subprime mortgage companies. It cratered before the building was completed.

When commercial real estate starts selling at replacement cost versus a multiple of expected future net operating income you have a really sick market. I’ve seen a lot of estimates of discounts of 30% to 40% off of the purchase price for commercial properties that have been sold in the last three or four years. That might be too conservative given this transaction.

All real estate is local so it’s a mistake to extrapolate too much with this deal. Maguire might be desperate, Irvine might be a dog market (it is right now) or the property may be poorly designed. Discounting all of that, I’m still left with the opinion that commercial real estate is about to get crushed.

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