IRVINE, CA—Capital flows into Orange County office product have increased in 2017, with new investors coming into the local market on a consistent basis throughout this past year, JLL EVP G. Ryan Smith tells GlobeSt.com. As we recently reported, according to a report from the firm, based on properties 50,000 square feet and greater, Orange County office-sales activity in 2017 has set new records based on the first three quarters of a year.
The report reveals that from Q1 through Q3, total sales volume of $1.9 billion broke the previous record set in 2015 of $1.7 billion. Additionally, the 2017 average price per square foot of $286 shattered the 2008 price point of $282.
The largest transaction in 2017 saw FivePoint Holdings purchase the 1-million-square-foot, four building FivePoint Gateway project from Broadcom in a sale-leaseback deal for $443 million ($426 per square foot). Broadcom agreed to lease two of the buildings for 660,690 square feet.
Also, private-capital firms are very active in the Orange County market; they are attracted to the growing local economy and favorable market conditions including low vacancy and rising rents.
We spoke with Smith about what has driven the high sales in this market, how private investors approach these transactions versus public companies and his expectations for 2018.
GlobeSt.com: To what do you attribute the record-setting office sales volume for Orange County in 2017?
Smith: In 2016, approximately 1/3 of the office buildings that were brought to market in Orange County failed to trade. As the underlying market fundamentals (rents, occupancy, etc.) continued to improve, this was able to position many of these failed transactions to a point where their values fell in line with seller expectations and ultimately traded in 2017. In addition, we have seen increase in capital flows into Orange County office product, with new investors coming into the local market on a consistent basis throughout this past year.
GlobeSt.com: How does private investors' approach to these transactions differ from those of public companies or institutions?
Smith: Private investors, several of whom have been very active as of late, generally take a much longer-term approach on holding real estate assets. This approach has allowed private investors to take advantage of acquiring high-quality Orange County office buildings at a low relative basis, averaging just below $300 per square foot, with excellent prospects for long-term appreciation.
GlobeSt.com: Do you expect similar or greater volume for 2018?
Smith: While a significant amount of product has traded recently in Orange County, I still believe that there are numerous owners that will take advantage of the strong marketplace and the abundance of capital looking to invest in office product. As such, I would anticipate that the volume levels for 2018 will be similar to what we have seen this year.
GlobeSt.com: What else should our readers take away from this snapshot?
Smith: Orange County continues to attract new businesses, employees and residents every day, all of which lead to growth in office absorption. Given the limited new office construction in Orange County, and the ability to acquire buildings well below replacement cost, the Orange County office market will continue to be an attractive place for capital seeking quality investment opportunities.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
