Lee: There are many theories as to why. One is that sellers were waiting to see how some of the policies in DC sorted themselves out. It sounds like people are getting more assurance now into what is going to happen, and it looks like not much significant tax reform is going to happen. We have also seen a considerable drop off in Chinese investment, so it might be that owners were waiting to see if that was a temporary blip or if that was a long-term trend. What we are seeing from our partners is that the Chinese capital drop off, because of government restrictions, is going to be a three-to-five year horizon. At some point, it will come back, but it isn't going to be this year or next year. I think owners wanted to wait and get more clarity on that. Chinese buyers have been a big factor in driving prices for the last couple of years.

GlobeSt.com: How has the buyer pool changed as a result of the higher pricing?

Lee: We have noticed that, although there is more activity now, the number of bidders has declined a bit. Part of that is that real estate firms are becoming a victim of their own success and are being priced out of the market. Yields are going down and cap rates are continuing to trend downward, and there aren't great value-add opportunities left. We noticed that in the first round of bidding, there are a lot of competitors and a lot of people getting involved in the bids; however, in the second round of bidding, a lot of people are falling out. In the past, you would still see a number of bidders in the second and third round, and that isn't happening anymore. That is probably and indication that the market is priced out.

GlobeSt.com: Have you had to adapt your investment strategy in L.A. as well?

Lee: We have two acquisitions underway in the L.A. market, and that is because we had capital partners that wanted to focus on core markets, so they were okay with those lower yields. Some of the other partners that we work with have certain requirements in terms of yields, and we are starting to have to look outside of the L.A. area to meet those requirements. We are finding the same thing in other geographies, though, where we might get a couple points more in terms of returns, but there is an inherent risk in going outside of the core market.

GlobeSt.com: With fewer buyers in the market as we move into 2018, who do you think will be the dominant players next year?

Lee: We are also seeing that there are some large real estate and private equity funds that are still raising $1 or $2 billion in capital. It looks like those funds are going to be looking in core areas and most of them are going to be looking at value-add. So, as some of the patient capital is starting to dwindle, we are seeing that these private equity funds are going to be the buyers next year. There is still going to be a bench of buyers, but it is much slimmer and there will be less competition. As a result, prices will rise much slower than they have this year.

GlobeSt.com: Do you expect prices to continue to rise in 2018?

Lee: We expect rents to continue to rise, but at a much slower pace. As long as there is one buyer that is okay with lower yields, sellers will still be able to get the prices that they are looking for. Next year, we think that prices are going to increase at a much slower pace. The number of buyers out there with patient capital that are okay with lower yields are starting to dwindle. We think that this quarter and in the beginning of next year, that backlog of capital will start to work through, and there just aren't going to be as many buyers.

The office buyer pool is shrinking. This year, office investment was active in the first and second quarters, but over the summer activity slowed. While opportunities have returned—a good sign for more activity next year—the buyer pool is waiting on the sidelines in response to high prices, or it is leaving the market altogether. Next year, Tim Lee, VP at Olive Hill Group, expects private equity funds to dominate the market while private capital and opportunistic investors wait for better pricing and higher yields. We sat down with Lee for an exclusive interview to talk about the office activity this year and what he expects for the fourth quarter and beyond.

GlobeSt.com: How has the performance of the L.A. office market this year aligned with your initial expectations?

Tim Lee: At the beginning of the year, there was momentum from the previous year in terms of investment sale activity. We were quite busy. The summer months and quarter 3, however, got really quite. The number of deals went down and the opportunities and listings also went down. We were getting concerned because we had capital to deploy before the end of the year. We weren't sure that we were going to get the money in place before the end of the year. Starting at the end of September, there was an uptick in activity, and it looks like a number of owners held off until after Labor Day to begin marketing their projects. We are hearing this from some of our partners as well. It wasn't because of any economic issues. It seems like sellers wanted to wait until the end of the year to execute their sales. We are really excited now because it seems like quarter four will be back to where the first two quarters were in terms of activity.

GlobeSt.com: Why do you think activity slowed in the third quarter?

Lee: There are many theories as to why. One is that sellers were waiting to see how some of the policies in DC sorted themselves out. It sounds like people are getting more assurance now into what is going to happen, and it looks like not much significant tax reform is going to happen. We have also seen a considerable drop off in Chinese investment, so it might be that owners were waiting to see if that was a temporary blip or if that was a long-term trend. What we are seeing from our partners is that the Chinese capital drop off, because of government restrictions, is going to be a three-to-five year horizon. At some point, it will come back, but it isn't going to be this year or next year. I think owners wanted to wait and get more clarity on that. Chinese buyers have been a big factor in driving prices for the last couple of years.

GlobeSt.com: How has the buyer pool changed as a result of the higher pricing?

Lee: We have noticed that, although there is more activity now, the number of bidders has declined a bit. Part of that is that real estate firms are becoming a victim of their own success and are being priced out of the market. Yields are going down and cap rates are continuing to trend downward, and there aren't great value-add opportunities left. We noticed that in the first round of bidding, there are a lot of competitors and a lot of people getting involved in the bids; however, in the second round of bidding, a lot of people are falling out. In the past, you would still see a number of bidders in the second and third round, and that isn't happening anymore. That is probably and indication that the market is priced out.

GlobeSt.com: Have you had to adapt your investment strategy in L.A. as well?

Lee: We have two acquisitions underway in the L.A. market, and that is because we had capital partners that wanted to focus on core markets, so they were okay with those lower yields. Some of the other partners that we work with have certain requirements in terms of yields, and we are starting to have to look outside of the L.A. area to meet those requirements. We are finding the same thing in other geographies, though, where we might get a couple points more in terms of returns, but there is an inherent risk in going outside of the core market.

GlobeSt.com: With fewer buyers in the market as we move into 2018, who do you think will be the dominant players next year?

Lee: We are also seeing that there are some large real estate and private equity funds that are still raising $1 or $2 billion in capital. It looks like those funds are going to be looking in core areas and most of them are going to be looking at value-add. So, as some of the patient capital is starting to dwindle, we are seeing that these private equity funds are going to be the buyers next year. There is still going to be a bench of buyers, but it is much slimmer and there will be less competition. As a result, prices will rise much slower than they have this year.

GlobeSt.com: Do you expect prices to continue to rise in 2018?

Lee: We expect rents to continue to rise, but at a much slower pace. As long as there is one buyer that is okay with lower yields, sellers will still be able to get the prices that they are looking for. Next year, we think that prices are going to increase at a much slower pace. The number of buyers out there with patient capital that are okay with lower yields are starting to dwindle. We think that this quarter and in the beginning of next year, that backlog of capital will start to work through, and there just aren't going to be as many buyers.