REAL ESTATE WATCH
Indications of Market Turn in North, Central County
By KEN BARRY
Brokers see recent market behavior and increasing activity that indicates the bottom could be near.
In Orange County’s office and industrial markets, a few more tenants are looking to lease space and making offers than have been seen in more than a year. Low interest rates are driving interest in buying small office and industrial buildings, rather than leasing space. High prices are the result.
Interest rate increases could mean that more leasing activity is ahead if small office and industrial building prices hold and total ownership costs exceed the costs of leasing space.
Part of the pick up in activity is the result of recent rent reductions. But few brokers are crowing that this activity change is big and that the market has absolutely picked up; it is more about the fact that the activity is present where it wasn’t before. The lack of new job formation locally has stymied increases in net absorption and rents for office and industrial space in OC’s north and central areas. Few “new” office and industrial tenants have been seen in the market so far.
OC retail rents and occupancy levels are at the highest point since CB began tracking retail statistics in the mid-1990s.
Meanwhile, office and industrial rents and occupancies have been declining since their peaks in 1999 and 2000. North and Central County rent and occupancy rates are below OC averages.
Larger office property owners have seen some “move-up” office space absorption in response to building upgrades and rent reductions, while other space moves are merely in response to lower rents.
Industrial absorption has been down as tenants and owners adjust to the global economy, highlighted by increased productivity here and cheaper labor elsewhere.
Retail net leased property sale cap rates and prices per pound still are moving to record levels despite the increases in interest rates. Industrial properties are seeing more all-cash institutional purchase transactions and relatively fewer 1031 exchange transactions. But cap rates have remained about the same because interest rates for leveraged transactions result in lower equity yields than have been seen recently.
Office investment sales are fewer in number and remain underwriting-challenged due to soft leasing conditions.
Finally, the pipeline of new development has declined for all three property types.
The CBRE Torto Wheaton economic and real estate research group found that there could be structural changes in the office and industrial markets as globalization continues.
The researchers say that the national average amount of office space required per employee has declined significantly as worker productivity has increased. They found that the space usage per employee in OC is about 5% to 6% higher than the national averages with the potential for increasing vacancy if the national trends hold true here.
Further, companies are shifting manufacturing and office jobs out of the U.S. in some sectors. This “off-shoring” of jobs may represent a longer-term structural change in these two market segments.
Finally, all of this could go away when the county posts office and industrial job gains, as OC’s real estate fundamentals would change in a dramatic and positive manner.
Barry is a vice president of investment properties in the Anaheim office of CB Richard Ellis.
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