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2018 Preview: Real Estate

Orange County’s real estate market is approaching its ninth year of growth, albeit sometimes choppy growth, largely unprecedented territory considering most real estate cycles last six or seven years at best. The consensus view is that there’s still room—perhaps two years—for additional growth, and that the inevitable downturn will have a much softer landing than its predecessor. But the consensus has been wrong before. We’ll be keeping a close eye on signs—leasing slowdowns and shorter extensions, a stall in construction work, or interesting sales activity, for example—that point to a sooner-than-expected turn in fortune.

In the meantime, here are some notable storylines for the area’s commercial and residential real estate sectors that will no doubt be a source of stories for the Business Journal entering 2018.

Stories to Watch

• Office Developer Duels: There’s heavy competition for tenants seeking brand-new office space in and around Irvine; Trammell Crow’s Boardwalk is finishing up work near the airport and getting some leasing traction, while Lincoln Property Co. and Alcion Ventures have construction under way on its Flight project just over the city line at Tustin Legacy. Along with creative-office redevelopment projects, both developers also have to compete with Irvine Co., which has grabbed the lion’s share of leasing activity at its new Spectrum-area office projects, and has more on the way. Even with rents trending upward, savvy tenants will be on the hunt for deals in 2018 as those developers look to best competitors and fill new buildings.

• How Low Can Industrial Go? OC’s industrial base of buildings, totaling some 250 million square feet, ends the year with a hard-to-fathom vacancy rate between just 3% and 4%, if not lower, depending on which brokerage report you read. With little product on the horizon, lease rates appear poised to keep going up—they’re now at about 87 cents per square foot, per month, up about 4% year-over-year. The handful of industrial developers building here—Western Realco’s 1-million-square-foot Beckman Business Center in Fullerton the largest of the bunch—are in an enviable position as the year kicks off.

• What Housing Bubble? Last year I predicted that overseas investors could get scared off by political uncertainty in the U.S., leading to a cooling off in new-home sales in OC. So much for that—foreign capital continued to pour into the region’s growing base of master-planned communities, with builders selling homes just about as fast as they could build them, and prices continuing to increase. The coming year brings another source of uncertainty with tax reform’s implications—limits on mortgage interest deductions and perhaps a loss of the local income and property tax deduction (SALT)—throwing a monkey wrench into the area’s building industry. Would it be a mistake to double down on my pessimistic bet from last year?

• Apartment Overdrive: Brokerage Marcus & Millichap estimates that about 7,440 rental units will be completed in large apartment projects across the county, a record level. It probably seems like more, factoring in all of the cranes in operation at rental complexes in just about every city here as the year comes to a close. The projects in general have a decidedly upscale focus, and rents beyond the means of a good portion of the local population. Housing affordability continues to be a major issue for OC, with few manageable short-term solutions.

• Master Planner Competition: Five Point Communities Inc. made the largest office acquisition in OC history this year with the buy of the new Broadcom campus, now called Five Point Gateway, kicking off a business line in commercial development while preparing for thousands of additional homes on its land. Irvine Co., meanwhile, had its land become the biggest source of new homes in the country, filled up its new offices at a dizzying pace, and saw Chairman Donald Bren go all-in to land Amazon’s HQ2. To call 2017 a busy year for the two largest master developers in Irvine would be an understatement. And next year promises more intrigue for the two sometime competitors, both on the commercial and residential fronts.

Last Year’s Stories

• Last year we chose Related California’s Bill Witte as our person to watch, largely stemming from his development company’s role in trying to get approvals for a luxury condo tower in Newport Center. Vocal opposition to the project halted it in the early part of the year, but Related still had an impact on the area, with an arguably more important project: It was part of a group that opened some affordable housing communities in Irvine’s Great Park Neighborhoods, and was one of the few local communities to tackle that segment of the housing market this year.

• Development of the Platinum Triangle continued in full force this year with a bevy of apartment projects under way or built in the vicinity of Angel Stadium by year’s end. But the most ambitious development on the books—LT Global’s 14.8-acre mixed-use project, LT Platinum Center, wasn’t among them. We chose LT Global as our 2017 company to watch to see if the Hong Kong-based firm was ready to commit the tens of millions of dollars to build the towers, hotel, apartments and retail project it has promised the city. We’re still waiting.

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Mark Mueller
Mark Mueller
Mark is the Editor-in-Chief of the Orange County Business Journal, one of the premier regional business newspapers in the country. He’s the fifth person to hold the editor’s position in the paper’s long history. He oversees a staff of about 15 people. The OCBJ is considered a must-read for area business executives. The print edition of the paper is the primary source of local news for most of the Business Journal’s subscribers, which includes most of OC’s major corporate and community players. Mark’s been with the paper since 2005, and long served as the real estate reporter for the paper, breaking hundreds of commercial and residential real estate stories. He took on the editor’s position in 2018.
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