Central Orange County is seeing a rise in property values, thanks to strong tenant demand and rising rents. The recent sale of City Tower illustrated the upward trend. KBS Strategic Opportunity REIT purchased the 20-story, 435,177-square-foot class-A office building from Torchlight Investors for $147.5 million or $338 per square foot. City Tower is the tallest building in Central Orange County, and is leased to UC Irvine Medical Center, Enterprise Rent-A-Car, Travelers Insurance and York Risk Services Group.
“This area has been very active with multiple requirements and notable demand from the healthcare and government sectors, specifically,” Paul Jones, a senior managing director at Newmark Knight Frank, tells GlobeSt.com. “Furthermore, several of the high-profile office towers in Central Orange County—like City Tower—have been purchased by well-capitalized, institutional buyers that are investing significant capital to improve the assets, resulting in increased tenant demand. All of this is bolstered by the lack of development in the submarket.” Jones, along with Kevin Shannon, Sean Fulp and Blake Bokosky, represented the seller in the deal.
In fact, the upswing in property values motivated Torchlight to dispose of the asset, especially because it had repositioned and stabilizing the property since taking full ownership in 2014. “City Tower is a premier class A-office tower in Orange County and, as a result of the healthy capital markets environment, the current lack of Class A product along the West Coast and strong interest from all buyer groups, Torchlight Investors recognized it was a great opportunity to monetize their trophy asset,” explains Jones.
They weren't wrong. The deal was extremely competitive, and the brokerage team saw interest from a range of capital sources. “We saw very strong interest from all buckets of capital; it was a very competitive process that resulted in multiple buyers all wanting to purchase City Tower,” says Jones. “Orange County infrequently sees large office transactions that trade north of $100 million, so investors saw this as an opportunity to place a substantial amount of capital in a single trade, while also purchasing what is historically considered the nicest class-A tower in Central Orange County. We ran our traditional marketing process, which took approximately 90 days from hitting the market to closing.”
Despite the high price tag, there is still upside in the property. It is 78% leased, and tenant demand is increasing. Unlike other high-end office markets on the West Coast, this market has not yet seen oversaturation. “There is currently a lack of high-quality office product on the market and City Tower—much like a majority of deals that are trading—saw very strong buyer activity from all sources of capital,” Jones adds. “Buyers are still able to purchase well below replacement cost and they recognize that there is still room to run when it comes to pushing market rents. Additionally, when compared to markets in Northern California and the Pacific Northwest, like San Francisco, Silicon Valley, Seattle, Portland, and West Los Angeles, specifically Santa Monica, Playa Vista, El Segundo, Orange County is a very strong basis market.”
Overall, the central location will ensure the market's popularity among tenants. “Central Orange County has long been known as a back-office market. Due to its central location, the submarket provides easy access for employees that live in Orange County, Los Angeles and Riverside, while being a reverse commute for the executives that live in coastal neighborhoods,” explains Jones. “Compared to office product in the Greater Airport Area and South Orange County, Central Orange County offers both a significant discount to replacement cost and also relative basis upon purchase price.”
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Kelsi Maree Borland
