Buyers continue to push the envelope when it comes to acquiring industrial, office and retail buildings in Orange County.
Record high per square foot prices, and lower-than-ever capitalization rates are being seen in all types of building sales in the county in recent months. And the deals are getting done faster than ever.
Most local real estate watchers don’t expect those trends to stop.
“It seems (likely) a great time to sell. (Sellers) can still forecast continued growth in the market, along with some big rent increases,” said Greg May, senior vice president for the Newport Beach-based office of Grubb & Ellis Co.
“Even though vacancy rates have been flat the past few quarters, rental rates are just shooting up,” May said. “It’s easy to sell the future right now.”
A number of high-profile office towers traded hands in 2006 and in early 2007, but it isn’t just high-rises that are commanding record rates.
In January, Birtcher Anderson Realty LLC of San Juan Capistrano and partner Boston-based BayNorth Equities sold Laguna Hills Square, a four-building medical office center totaling 51,734 square feet in Laguna Hills.
The property went for $20.7 million, or about $400 per square foot, and a 5.9% capitalization rate,the expected return on newly acquired properties from rents and fees.
The per square foot sales figure broke a record for commercial buildings 20,000 square feet or larger in south Orange County, according to brokers.
“It’s still a seller’s market,” said Birtcher Anderson’s Chief Executive Bob Anderson, at the time of the deal.
In the retail sector, Marbella Plaza, a 70,844-square-foot shopping center just off the San Diego (I-5) Freeway in San Juan Capistrano, was bought by a local investor in September of last year.
The deal set two local records for a grocery-anchored neighborhood center, according to brokers with Irvine-based Faris Lee Investments. It sold at the lowest cap rate, 5.7%, as well as the highest price per square foot,$415.
Faris Lee also brokered the sale of a 47,000-square-foot section of the Shops at Aliso Viejo earlier last year. That property sold for $39 million and a county retail record of $830 per square foot.
Why the high prices? There’s a limited number of available retail properties on the local market, which continue to sell at a premium, according to Faris Lee President Richard Walter.
“The supply versus demand curve is still in the seller’s favor,” Walter said.
The industrial sector is seeing record low cap rates as well.
A 44,457-square-foot multi-tenant industrial building on Gothard Street in Huntington Beach last month sold for $8.4 million. The cap rate for the deal? A rock-bottom 2.6%, according to brokers with the Newport Beach based office of CB Richard Ellis Group Inc.
Don’t be surprised to see more deals in the $20 million range or smaller,like the Huntington Beach sale,where the new owner plans to redevelop the site and turn the buildings into for-sale industrial condominium units, said Gary Stache, executive vice president for CB Richard Ellis.
“There is a tremendous amount of industrial capital (being targeted) for value-add properties,” that either need some construction work done to them, or have below-market rents, he said.
Those types of properties carry more risk for a buyer, but offer returns that normalized buildings,those leased up or not in need of any redevelopment,aren’t capable of.
Many industrial investors “have decided that the pricing on core properties was getting a little too high,” Stache said.
For larger office buildings and portfolios, buyers aren’t just paying higher-than-ever rates. They’re also moving fast to close the transactions.
Case and point: Maguire Properties Inc.’s $3 billion acquisition of the local office holdings of Equity Office Properties Trust was completed days after New York’s Blackstone Group LP finalized its $39 billion buy of Equity’s national holdings.
It’s unlikely that Maguire completed a thorough amount of due diligence for the transaction, said Kurt Strasmann, managing director for the OC operations of Grubb & Ellis.
“Buyers are banking more on the strength of the market, than they are the quality of the buildings,” he said.
The challenge for new owners will be to convince existing tenants that the rent increases coming their way are being done not just to finance their expensive buys, but to bring rates up to what others in the market are charging for similar buildings.
In Maguire’s case, the company said it believes rents at Equity buildings in the county are as much as 26% below market rates. Maguire has an aggressive plan to up rents at the former Equity buildings.
That could be a tough sell, said Randall Parker, managing director for Newport Beach-based brokerage Travers Realty Corp., which represents tenants in lease deals.
Owners such as Maguire “will be hard pressed to justify these rents,” he said.
If new owners show a commitment to their new properties, some of those concerns will be taken care of, said Bruce Schuman, senior vice president for the Ir
vine office of Studley Inc.
Some office tenants at Equity’s old buildings “are nervous, but (the acquisition) isn’t necessarily a bad thing,” Schuman said.
“It’s good for the market when a quality owner (like Maguire) is the buyer,” he said. “Yes, they’ll charge more money, but a good owner will act smart, and spend money on older buildings. Their value will justify (the increases).”
