Britton: “We are seeing investors becoming more disciplined in their purchases, and some are choosing not to enter the 'bidding frenzy' on assets in secondary markets.”

ORANGE COUNTY, CA—While it may seem like many Orange County-based investors who have sold large assets and portfolios in recent months are stepping back, Voit Real Estate Services' managing director Ian Britton tells GlobeSt.com that it's part of a bigger strategy. We spoke exclusively with Britton to get his take on the thought processes of these larger firms and how they will proceed in the next 18 to 24 months.

GlobeSt.com: What's next for OC-based investors who have sold large assets and portfolios in recent months?

Britton: I think the simple answer is “business as usual.” While it may seem like many of these established investors are taking some chips off the table, the reality is most of them are simply executing on their business plans. Local investors like LBA and CT, who have recently sold portfolios or are preparing to do so, maintain closed-end funds that have a defined life. These groups and many others have elected to take advantage of attractive and escalating sale prices in a market where pension funds (and foreign investors) are competing with one another to place large amounts of capital. Many pension funds are under-allocated in industrial real estate and are looking for the right opportunity to invest significant capital in a healthy and diverse industrial market like Orange County.

“Bigger is better” seems to be a theme over the past several quarters since sellers are now aggregating multiple properties to boost value and make their offering more attractive to buyers targeting portfolios north of $100 million in some cases. A textbook example is Bentall Kennedy's (in partnership with CalPERS) $188-million purchase of the Anaheim Concourse (developed by Panattoni and Clarion Partners). There continues to be a great deal of competition for core, class-A product in the infill markets and the barriers to entry (limited industrial land, rising construction costs and increasing regulations) for developing new product are so severe that buyers are willing to accept a more modest return to control existing quality properties.

GlobeSt.com: How are these investors viewing the OC market currently, and how are their strategies changing for the next 18 to 24 months?

Britton: At Voit, we have the unique privilege of working with small business owners, local/regional investors as well as large institutional owners of industrial real estate. Most of our clients are very bullish on the market in the near term. The fundamentals of the market remain very strong as businesses continue to expand and make strategic hires. Occupancy levels are as robust as they have ever been (some submarkets are at 1% vacancy), while rents and cash flows continue to rise. While most agree we are late in the current cycle and that we will not see as sharp of a spike in values in the coming quarters as we have seen in recent years, most feel there is still some “room to run.”

That being said, a key word with all of our clients in this environment has been “discipline.” We are seeing investors becoming more disciplined in their purchases, and some are choosing not to enter the “bidding frenzy” on assets in secondary markets. From a development standpoint, investors are focused on tightening their development timelines so they can deliver product as soon as possible.

Buyers are also becoming more selective on the credit associated with the properties they purchase as we enter the later innings of the game. Other clients are using this window of time to dispose of assets that may not fit into their portfolio as we enter the next cycle. We have noticed larger investors starting to “right-size” their portfolios and eliminate assets that may require a significant capital investment in the coming years or may have some functional challenges, making them more difficult to lease to “credit” tenants in the coming years.

GlobeSt.com: Are investors now evaluating markets outside of Southern California in this competitive market, and what are some current challenges for traditional investors today?

Britton: Many investors who have traditionally focused on SoCal exclusively are now pursuing other markets like Phoenix, Vegas, Texas and even the Pacific Northwest in search of higher yields. Orange County investors have traditionally been value-add players, focused primarily on buying property at a discount to replacement cost, fixing a critical issue or deficiency with the property and then selling it. From an investor's perspective, the ongoing challenge in today's environment is finding a “deal,” since users are often outbidding local investors and are willing to overlook some functional challenges of a property to secure a long-term home for their expanding business. By buying a property as opposed to leasing, a business owner can control his or her occupancy costs in this attractive-interest-rate environment, receive favorable tax treatment, create a retirement tool and avoid annual rent increases paid to a landlord. Investors are having to work harder to find opportunities as users and exchange buyers continue to be very motivated, driving prices up.