Economic Growth Could Hurt California Real Estate Industry

The current surge in economic growth could pose a threat to some debt-laden homeowners and won't soon help owners of vacant office buildings, real estate investors and analysts warned Tuesday.

In an economy that now seems in "full recovery mode," property owners will benefit from job growth but suffer the from rising interest rates, said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics.

About 400 real estate professionals who gathered in a hotel ballroom for the Fisher Center's twice-a-year all-day conference found little to cheer about.

Housing demand and prices in the Bay Area are likely to stall or slump, rents and occupancy rates in commercial properties are stuck in a rut, and California's government is unable to cope, a succession of panelists warned.

Even the normally upbeat Leslie Appleton-Young, economist for the California Association of Realtors, warned that the state's once unstoppable housing markets seem ready to reverse direction. "We may have to pay the piper a little bit for all the feasting we've had on these wonderful rates," she said, referring to house borrowing costs that had reached historical lows but are now expected to rise.

Economists normally view job growth as the underlying factor in strong real estate markets. But in the Bay Area, low interest rates fueled demand and double-digit price appreciation in the house market despite a technology crash in 2000 that chopped 400,000 jobs from the region's economy.

Rosen described low interest rates as the "heroin" that fueled that euphoria in the house market, and warned that prices could be flat or go down over the next three years.

Stephen Chamberlin, a Philadelphia homebuilder, offered an even more grim view. He urged investors to bet on a decline in the stock prices of his publicly traded competitors. "Housing has clearly reached a bubble stage," he said. "Something ugly is going to happen."

Dale Ann Reiss, a real estate analyst for the accounting firm Ernst & Young, said that risks are especially great for homebuyers who took advantage of "very aggressive lending at variable rates." Their distress could spread, since a lack of equity and rising interest rates could prompt some highly leveraged borrowers to walk away from houses and boost housing supply with foreclosed properties, she said.

In the commercial sector, local building owners are still waiting for job growth that would fill some of the acres of empty offices in the Bay Area, Rosen said.

With rents still sharply lower than only a few years ago, the best face that Michael Smith, the Bay Area manager for CB Richard Ellis, could put on things was that "clearly, our market has hit bottom."

But investors still have an appetite for office properties -- as long as they are filled with tenants. "There is more money chasing deals than there are deals," said Luis Belmonte, an executive vice president of AMB Property Corp. of San Francisco.

That has reduced returns on investments in U.S. offices, prompting AMB to sell U.S. office properties and buy buildings outside the country, he said.

Some investors have found bargains at home. Steven Pilch, chief operating officer of Divco West Properties of Palo Alto, was upbeat about his firm's participation in the purchase of the former ChevronTexaco Corp. headquarters in San Francisco. That 777,000-square-foot building was only 20 percent occupied when it sold for $80 million in November, but the new owners expect to boost that rate into the mid-40s soon, Pilch said.

Clouding the long-term prospects of office properties is the lack of investment in deteriorating infrastructure, including crowded roads, in the Bay Area and throughout California, Belmonte said. The need to reduce the state's structural budget deficit will inevitably lead to higher property taxes on commercial properties, he said.

But Rex Hime, a lobbyist for commercial property owners, said higher property taxes on his members would be blocked by a new political alliance with a powerful advocacy group for small property owners. "The commercial real estate community and the Howard Jarvis folks have now become joined at the hip," Hime said.