REAL ESTATE WATCH – High-Rise Office Market
The Orange County high-rise office market rebounded in the first half of the year, posting more than 600,000 square feet of positive net absorption.
Along with increased leasing activity, the investment market remained strong with several high-rise office buildings selling or coming to market in Central County and the greater John Wayne Airport area during the period.
Four class A high-rise buildings have changed hands this year for more than $260 million collectively. Six more buildings are either in escrow or coming to market with a total value of more than $250 million.
Institutional and private investors remain active. Their interest is due in large part to lower returns from alternative investments vehicles, a historically low interest rate environment, limited new construction activity and the county’s ranking as a top area to live and work in the U.S.
Many investors believe economic forecasts, which predict continued vigorous population and employment growth in OC in the next two decades, will outperform and provide economic stability not found in other U.S. markets.
A positive economic trend will have the greatest impact on the greater John Wayne Airport area given its profile as the “Central Business District” of OC containing about 48% of the county’s office space is in this area.
While most U.S. markets have seen increases in vacancy, the county’s high-rise office market posted a 3.5% decrease in the overall vacancy rate in the past year.
With the OC office market moving back to positive absorption, office leasing brokers and many investors believe vacancy rates will continue to decline,assuming supply remains constrained. That will cause tenants to accelerate their deal-making timeline before rental rates adjust upward.
Investors see this as an opportunity to take ownership of assets with a mixture of stability and near-term rollover risk to capitalize on the potential rent growth expected in the next three to five years. Increased absorption and a rise in rental rates should help offset recent and future increases in interest rates.
On the supply side, construction activity has stopped with no new developments set to break ground in the near term.
Restrictions resulting from Measure S on office development in Newport Beach and Irvine’s proposed annexation of the former El Toro Marine base for development of mostly open space and residential building is a boost for property value appreciation for existing high-rise office properties.
Several large high-end condominium and apartment developments are under way or planned in locations originally set for office development, which will eliminate new competition to existing office space.
With a limited number of high-rise opportunities for investors in office buildings, they are becoming increasingly more aggressive in their underwriting assumptions.
This, coupled with the favorable debt environment, makes for a very competitive market providing sellers with multiple bidders.
Southern California remains one of the top three markets for office investment in the U.S. and will continue to see sustained interest.
Analysis by The Smith Team: Bob Smith, senior vice president/partner; Michael Kane, senior associate; Karen Scholte, project manager; Nels Billsten, project manager; David Otte, senior real estate analyst; and Erin Brehm, marketing assistant, in the Newport Beach office of CB Richard Ellis.
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