Real Estate Watch: West Orange County
West County Owner/User Market Constrained
By SCOTT FRAZIER
The owner/user market for office buildings, a staple of the industrial market, is gaining in popularity. That’s in contrast with office leasing, the better-known segment of the commercial real estate market, which is struggling.
With the recent divergence of office lease rates,upward,and loan rates,downward,the appeal for a company to own its own building is as high as it ever has been. In most cases, a buyer’s monthly outlay,mortgage, insurance, utilities and upkeep among others,is less than what they would expect to pay in rent.
With the smaller down payment required, a Small Business Administration loan allows more businesses to buy, while keeping the mortgage below rental costs. Additionally, there are tax advantages to owning property.
But a big problem with this strategy in West Orange County is the lack of available office space.
In West County, there are about 250 to 300 buildings below 20,000 square feet,a popular size for owner/users.
Ten of these buildings changed hands in the last year. The number of office buildings below 20,000 square feet that are being actively marketed for sale is about 10. Of these, many are investment properties with one or more longer-term tenants and not immediately suitable for owner/users.
In short, the demand for these buildings far outstrips the supply. Once bought, office space is held for a long period and isn’t resold as quickly as investment property.
Looking outside West County does not greatly improve the supply and demand equation. To the north, the greater Long Beach market has a similar number of buildings of this size range for sale and, while the John Wayne Airport market has more opportunities, those for sale are as much as double the cost on a per square foot basis.
That price level chips away at the rent vs. mortgage equation.
Of course, building ownership is not for everyone. Companies with a need for flexibility due to growth or the cyclical nature of their business may have difficulty locking themselves into a property.
While some buyers will purchase a larger building to accommodate some growth, until the size of the firm stabilizes, it might be best to tap the numerous available leasing alternatives.
Frazier is an associate in CB Richard Ellis’ Anaheim office.
