After a strong 2021 that sent commercial activity soaring in the wake of the pandemic, brokers are counting their losses with property types across the board taking a hit amid rising interest rates.
“If you’re comparing anything to 2021, it will be a major drop off,” Steve Wagner, managing director of the Irvine office of JLL, told the Business Journal. “Despite the skewed drop-off latter part of the year, 2022 was very busy.”
The hit hasn’t been as severe as some might have thought, given rising interest rates troubled the financial waters.
The retail sector, for example, benefitted from a surge in demand from fitness chains, quick-service restaurants and entertainment venues, notes Matthew Mousavi, managing principal of SRS Real Estate Partners’ National Net Lease Group.
“Our business was in line with 2021 levels,” Mousavi said.
The slowdown has been more prominent in the first few months of the year, brokers note.
During the first quarter, commercial property sales volume totaled $826 million for Orange County, nearly one-third of the average quarterly volume seen in 2022, according to Real Capital Analytics data.
“The slowest transaction volume on record for Orange County was $826 million during the second quarter of 2020,” El Warner, vice chair of retail capital markets at Colliers, told the Business Journal. “The low volume seen during the first quarter of this year has largely come from a lack of supply.”
In this year’s Business Journal ranking of commercial brokerage firms, data for which considers 2022 transactions, the area’s top 23 commercial brokerage firms handled $45.1 billion in sales and lease deals last year, a 6.4% drop from 2021.
In 2021, the top 21 firms handled $47 billion in deals last year, a nearly 60% jump year-over-year. That was the largest percentage increase seen in over a decade, though still below pre-pandemic levels in total volume.
Industrial
The industrial segment has cooled from the breakneck highs seen during 2021, though the market is still at record highs with historically low vacancies and rising rental rates.
“The Orange County industrial market is finally cooling off, but remains expensive and undersupplied,” a recent market report from Voit Real Estate Services said.
At the end of 2022, asking rents for warehouse and distribution buildings were up 30% year-over-year to $1.56 per square foot, while vacancy rates are hovering near 1%, a record low.
Lease and sale activity is being restricted by a shortage of Class A available space, and that shortage is expected to continue as developers are in a wait-and-see mode due to unfavorable market conditions.
“Development has slowed, but new Class A development would be received well in the market,” Wagner said.
E-commerce companies aren’t voraciously scouting space like they were a year ago, but that hasn’t impacted Orange County much, Wagner notes, with the region benefiting from a diverse industrial customer base.
“OC is much less reliant on e-commerce or logistics than the Inland Empire. It’s not driven by any one industry,” Wagner said.
The total square footage sold and leased during the fourth quarter fell to 2.3 million square feet from 5.2 million square feet in the prior quarter.
JLL ranks No. 2 on the list with an estimated $4.7 billion in 2022 sales and lease transactions.
Retail
SRS Real Estate Partners’ National Net Lease Group, which is based out of Newport Beach and ranks No. 6 on the list, closed $3 billion in investment sales last year across 35 states.
The group sold a total of 22 properties leased to fast-food restaurant Chick-fil-A last year for a total sales volume of $87 million with an average cap rate of 3.8%.
“The QSR segment is really in demand from private capital,” Mousavi said.
Childcare centers and medical assets also represented bright spots for the retail sector in 2022.
In a recent deal for SRS, the group brokered a $14.2 million ground lease sale of Lake Forest Marketplace, a 111,212-square-foot retail center at 23771 to 23841 El Toro Road.
SRS Senior Vice President John Redfield represented the seller, La Caze Development; the private OC buyer was represented by Jon Davis from SVN.
“Orange County is well-positioned,” Mousavi said. “I’m not expecting a lot of distress, if any, in the retail market this year.”
