Maguire Prepares to Mail Keys to Lenders, Reports Loss

Maguire, one of the largest Southern California office-building owners, has warned it plans to hand over ownership of seven buildings with $1.06 billion in debt to its lenders. Like many commercial property investors, Maguire borrowed heavily in recent years to purchase properties based on hockey stick-shaped assumptions for future rent increases. The reality of a 20% office vacancy rate in Orange County, up from 6% just three years ago, is not really helping Maguire meet debt service payments. Who are the lucky new owners of the buildings? LBA Realty, who purchased the debt on one property at a discount in the spring, already has a deal in place to take over Park Place One, in Irvine, California. The other six properties were packaged into CMBS and are coming to a default rate near you in CMBS Land. The seven buildings make up about 20% of Maguire's portfolio.

It should come as no surprise then that Macguire posted a $375.7 million loss this morning due mostly to the $384.7 million in write-downs related to the aforementioned properties. Funds from operations were a negative $7.10 a share, but it you exclude the write-down, they were a nifty eight cents a share. From a company that only reported revenue of $134.78 million, results like these are disastrous.

For other, depressing commercial real estate news, please turn to page A5 in the WSJ where an article discusses how difficult it will be for commercial real estate in Southern California to rebound from current depressed levels. During the peak four years ago, construction was the fourth-largest employer in the Inland Empire counties of San Bernardino and Riverside. Housing contributed more than $24 billion in revenue to the Southern California economy in 2008, more than double the revenue from Hollywood movies. Fast forward to today where construction has ground to a complete halt and new office buildings sit empty or with few tenants. A few stark statistics: the greater Los Angeles area has lost approximately 15% of the total construction jobs, while the Inland Empire has lost 49% since 2006. The number of housing permits in the five county greater Los Angeles area has dropped by 85% from 2005. San Bernardino has seen housing permits plunge 96% since the 2005 high. Office vacancy rates have grown to 24% in Riverside counties while the retail vacancy rate in the Inland Empire hit 10.6% in the second quarter. With stats like these, it is hard to imagine that construction will help lead the area out of its current slump.