By GARY STACHE
There is softening in the lower price range of the investment office market, particularly buildings valued less than $20 million.
In the past couple of years, there was an average of 14 offers for every investment property taken to market, with investors often bidding up above the asking price. In the past 60 days, there has been a significant slowdown in the number of offers, and the offers are at higher capitalization rates.
Cap rates in the coastal areas rose 100 basis points in the past year to the 6.5% to 7% range. Inland properties now are in the 7% to 7.5% range.
But there are two factors holding down cap rates. The first: 10-year Treasuries have dropped back down to 4.6%. Lenders are becoming extremely aggressive at trying to get capital out. More buyers are using three- to five-year interest-only loans with the goal of having rents increase enough to cover the amortization.
One of the main factors adding to the slowdown is that previously half of buyers were apartment sellers or individuals who had sold land to homebuilders. Apartment cap rates have risen, consequently slowing activity. The homebuilding market, including condo conversions, also has slowed dramatically.
Some investors are taking a wait-and-see attitude, anticipating that cap rates will move upward and yields will increase. Since March, office leasing has slowed. So far this year, only 258,000 square feet has been absorbed, compared to the 3.7 million square feet absorbed by this time last year.
One factor that has impacted the absorption is the giveback of mortgage space, which accounts for more than 1.5 million square feet.
About 1 million square feet of this sublease space has been absorbed. According to many brokers, there has been an increase in leasing in the past 30 days.
Even with the giveback of mortgage space, low-rise office availability only is 11%, which, when compared to the nation, is extremely healthy. This rate is not expected to rise since there also is a lack of low-rise construction due to higher land and construction costs.
These uncertainties have made for sluggish low-rise office investment. But now may be the opportune time to buy,in this period of uncertainty.
There are some significant positive factors: Torto Wheaton, a market researcher that’s part of CB Richard Ellis Group Inc., ranks Orange County third in office rent growth in the next five years.
OC’s employment, which drives office demand, is up and projected to continue to outpace most of the nation.
The county’s $109 billion economy would rank it the 32nd wealthiest nation in the world. Due to quality of life and proximity to the ocean, it is one of the most desirable counties to live in the entire country.
When you look at the big picture, the positives seem to outweigh the negatives. This could be an excellent opportunity to buy and make money on low-rise office space.
Stache is an executive vice president in the Newport Beach office of CB Richard Ellis Group.
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