Deep-pocketed office investors flocked to Orange County last year looking for attractive investment yields while also betting on the market’s potential for rental growth over the next few years.
The 10 largest local office sales in 2014 totaled about $760 million, a nearly 12% increase over the value of 2013’s largest office transactions (see Top Deals listing, page 30).
The office market was the dominant form of commercial real estate in large sales here last year. The top 10 office deals represented about 46% of the cumulative $1.65 billion in transactions last year for OC’s 10 largest office, industrial, apartment and retail sales combined.
The 10 largest industrial deals made up the second largest sector for local investments, with 25% of the area’s cumulative sales, followed by apartments, 17%, and retail, 12%.
That’s no accident, according to Jeff Cole, executive director of the Irvine office of Cushman & Wakefield Inc.
“Toward the latter part of the year, more capital began to drift out from other areas to suburban office” investments, said Cole, whose team worked on two of the top 10 office deals last year: the $110 million sale of the Bank of America campus in Brea and the 18301 Von Karman office tower in Irvine that sold for nearly $68 million.
Capitalization rates have dropped to historical lows of 3% to 4% for industrial and multifamily deals in particular. Office deals in areas like OC, which is considered a suburban market, can offer buyers better yields, in the 5% to 6% range, Cole said.
“People see office as the last major sector to find” attractive yields, he said.
Area office investors backed in large part by private equity firms, insurance companies, and pension funds weren’t exactly bargain shopping in OC last year, despite the potential for better yields.
Last year was the first since 2008 that none of the top 10 local office sales included buildings known to be in financial distress.
The top 10 local office deals of 2014, which totaled about 3.6 million square feet, sold for an average price of $211 per square foot, a 26% increase over 2013 per-square-foot prices.
Brokers who handle larger office sales say there’s a solid rationale for the investments, despite the rising prices, and particularly when considering rents.
Big office markets in California, including Silicon Valley and parts of Los Angeles, have already seen the kind of investment money OC is now getting in office deals.
“Investment capital is attracted to Orange County because of the comparative basis advantage compared to other coastal markets, and the dramatic disparity that still exists between today’s rents and values versus peak rents and values,” said CBRE Group Inc. Vice Chairman Kevin Shannon, who heads the West Coast Institutional Group for the brokerage’s office division.
“Orange County has more upside potential than most coastal markets because of these dynamics.”
The average monthly rent for offices in OC now runs about $2.10 per square foot, up about 9% from early 2014, according to data from the Irvine office of Voit Real Estate Services.
Rents are projected to rise to about $2.15 per square foot by the end of the third quarter, according to Voit’s data.
“We’ve been touting (significant) rental growth for some time now. Now we’re actually starting to see it, particularly in the airport area,” Cushman’s Cole said.
Equity Office Tops
For the second year running, Chicago-based Equity Office Management LLC made a big impact on the Business Journal’s listing, this time with the $129 million buy of the Griffin Towers office complex in Santa Ana. The deal, brokered by CBRE, was the largest local office transaction of last year.
The two-building complex, which has long housed the headquarters of embattled educational company Corinthian Colleges Inc., was sold by Dallas-based Lincoln Property Co. Lincoln also sold the One Pacific Plaza office complex in Huntington Beach for $93.7 million, the No. 4 deal of the year.
Equity Office, which is backed by private equity giant Blackstone Group, also spent $50 million to buy the Red Hill Center in Costa Mesa last year, the eighth largest office sale on our listing.
Those two deals, along with three big-dollar purchases in 2013, pushed Equity Office’s two-year investment in OC’s office market past $400 million.
Insurance companies also made their mark as buyers in OC last year. John Hancock Real Estate paid LBA Realty in Irvine a little more than $94 million for Oracle Tower near John Wayne Airport; Prudential Real Estate Investors bought One Pacific Plaza; and Cigna bought a majority interest in the 18301 Von Karman tower.
Greenlaw Partners in Irvine was the most active among local investors, both as a buyer and seller. It partnered with New York-based investment firm Cerberus Capital Management LP in the largest of three purchases it was involved in when it bought the 637,503-square-foot Bank of America campus in Brea, the second largest office sale last year.
The company also partnered with Walton Street Capital LLC in Chicago to buy a pair of offices in Orange—the City Parkway Collection office portfolio at 500 and 600 City Parkway W.
Greenlaw, Walton Street and New York-based Westbrook Partners LLC also sold the 18301 Von Karman office to Cigna, but the Irvine-based investor stayed on as a partner in the new ownership group.
Data for the top office sales listing was provided by CoStar Group Inc.
