The coronavirus and its economic implications could serve as the catalyst to bring about a reset to the real estate market, which has been on a bullish tear over the past decade.
This year’s Business Journal ranking of commercial brokerage firms, data for which considers 2019 transactions, shows that sales and leasing activity in Orange County experienced its 10th consecutive year of gains.
Still, growth has slowed in recent years, and several brokerages saw declines over the year prior.
The area’s top 18 commercial brokerage firms handled about $32 billion in deals last year, up 3% year-over-year.
Compare that with the 5% increase in 2018, and a 17% surge in 2017.
The annual list ranks area brokerages by the dollar values of their commercial property and land deals done in OC last year, as well as those done elsewhere that were handled by the local office.
The overall number of reported lease transactions was flat, while sales volume was up 1.4%.
There were 780 OC brokers as of March, up 5.3% from the prior year, and 1,600 OC employees, up 4.7%.
Market Pause
The market was expected to continue to grow in 2020, with strong market fundamentals shown throughout the first quarter.
This momentum has been halted, with buyers and sellers in a wait-and-see mode.
Even with this noticeable pause, some suggest the financial impacts on the real estate market will be short-lived.
“It’s too early to tell what the full impact will be, but we know that this isn’t a pricing issue, it is an uncertainty issue,” said Kurt Strasmann, executive managing director at CBRE Group Inc.
“People are hitting the pause button.”
His company is once again No. 1, handling $5.9 billion in sales and lease transaction, up 1.4% from 2018.
Tenant Market
Slower growth in recent years may have been a result of the market hitting the top of its cycle, brokers suggest, with high pricing “almost becoming an economic concern,” said Brian Childs, executive managing director at NAI Capital, No. 11 on the list with $948 million in 2019 deals.
“There isn’t a lot of new product, and there’s a lot of pent-up demand for value-add opportunities, which has all but disappeared,” Childs said.
He added that the pause in dealmaking, as well as a loss of liquidity in the market, could lead to a reset of sorts.
Current conditions could also switch the office market from a landlord’s one to a tenant-controlled market.
“Expect the Orange County office market to shift firmly tenant favorable in 2020 as a somewhat softening market faces additional challenges with the COVID-19 crisis,” said a recent Savills market report.
The Newport Beach office of Savills, which exclusively represents tenants in rent negotiations, ranks No. 10 on the list.
A more tenant-friendly environment is already happening with lease negotiations, Childs notes.
“We had already negotiated a rate between a tenant and a landlord pre-COVID concerns, and the landlord agreed to a 30% reduction in the price just to keep the tenant on board,” he said.
“I think we will continue to see situations like that, with companies becoming more particular about their leases.”
Bounce Back
The impact has been felt the most by the retail sector, which was already in a state of flux, according to Childs (see related story, page 1).
“Retail was already in transition, with malls going out of style,” he said.
On the flip side, retailers specializing in an essential business category are experiencing record highs, according to Matthew Mousavi, managing principal of SRS Real Estate Partners.
“There is definitely going to be a long-term impact on the sector, and tenants are definitely going to hurt. But some will emerge as winners, like grocery store-anchored properties.”
Mousavi co-founded the firm’s Newport Beach office, which saw a 7.4% jump in business to about $1.1 billion last year. It’s No. 9 on the list.
The company is still busy with deals, Mousavi notes, handling north of $200 million in commercial investments under contract in the last month (see story, page 10).
