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Buyers clamor for Orange County, Calif., commercial real estate properties.

In Orange County, Calif., now is an outstanding time to be a seller, says John McDermott, regional manager of Sperry Van Ness in Irvine.

"This is the hottest investment market in 20 years in all property types," agrees Louis J. Tomaselli, senior vice president of Voit Commercial Brokerage in Anaheim. Leading the buying surge are former stock market investors taking advantage of low interest rates to redeploy their capital in real estate. Surprisingly, capitalization rates are at historically low levels, but buyers are willing to accept lower returns because "real estate is perceived to be more stable than other equity markets," Tomaselli says.

"Orange County has clearly been identified as one of the most favored locations for investment in the entire country," says Steven L. Ames, CCIM, of USAA Realty Co. in Irvine. He credits the area's relatively stable leasing markets, growing economy, positive employment, high cost of entry, and supply constraints. Sellers are capitalizing on these favorable conditions by cashing out of their lower-performing commercial real estate assets to build up cash reserves for future use, McDermott says.

Multifamily Leads the Investment Frenzy

Despite receiving modest 2 percent to 4 percent cash-on-cash returns, buyers are offering record-breaking prices for apartment properties, McDermott says. The median per-unit price increased 14 percent by year-end 2003, according to a Marcus & Millichap research report. As of September 2003, total Orange County multifamily investment reached nearly $1.1 billion, an increase of more than $200 million from the same period in 2002, McDermott says. The county's largest transaction was Essex Property Trust's $74 million sale of the 468-unit Villa Venetia in Costa Mesa to a San Francisco investment group.

Yet the majority of last year's more than 240 multifamily transactions (through September) were in the $1 million to $10 million range, as private investors flooded the market, taking advantage of low interest rates that allowed them to compete with institutional investors. Most of the activity comprised properties of 19 units or less, especially in Anaheim where the median per-unit price increased 19 percent, according to Marcus & Millichap.

"Properly priced multifamily properties will have multiple offers," says Gary Hunter, CCIM, of Re/Max Metro-Anaheim.

Although rents and per-unit sales prices have skyrocketed, demand for all multifamily property classes, especially luxury, is rising as employment numbers strengthen. Overall vacancy should drop to 3.5 percent by year's end, as average asking rents push toward $1,300 per unit, according to the Marcus & Millichap report. Sares-Regis Group's 548-unit super-luxury Watermarke Apartments and Townhomes de Luxe in Irvine reflects this growing trend: Rents start at $1,210 for a one-bedroom, 635-square-foot unit.

An almost-saturated market is forcing multifamily developers to increase new project densities. "New construction is limited to larger complexes," Hunter says. For example, last July Bosa Development broke ground on Irvine's first high-rise condominium community, a two-building, 232-unit complex called Marquee Park Place. Pent-up demand is apparent in the project's prices: Two-bedroom, 1,275-sf units start at $525,000.

Office Sells Despite Fundamentals

Orange County's office market is experiencing a dichotomy: Fundamentals are down, yet prices are up. Lease rates and tenant activity are flat, but buildings are selling at $20 per square foot to $30 psf over prices two years ago, according to Tomaselli. Average asking lease rates for all classes remained almost unchanged from third-quarter to fourth-quarter 2003 and dropped only slightly from one year previous, according to CB Richard Ellis' Office Market Index Brief.

Although class A properties drive the price increase, "there is a buyer for everything," Tomaselli says. Institutional investors lead the purchasing spree. For example, Wells Real Estate Investment Trust purchased a 171,451-sf building in Irvine from Koll Development Co. for $45.5 million and the nearly 134,000-sf Fairway Center II building in Brea from Lend Lease Real Estate Investments for $25.6 million.

Due to low interest rates, small investors have been exchanging their multifamily assets for office properties; thus, the $1 million to $5 million class B and C markets are hot, Tomaselli says. Small-office users also are taking advantage of rates to purchase rather than lease their buildings, leading to an increase of for-sale small-office developments, according to CB Richard Ellis.

Development remains well below average. Only 656,215 sf of office space was under construction in fourth-quarter 2003, down significantly from the more than 1 million sf one year previous; but absorption remained positive for the third consecutive quarter. The Airport Area submarket led absorption, followed by South County, according to CB Richard Ellis.

Construction activity should pick up this year as absorption increases and vacancy eases downward. CommonWealth Partners is planning the first new high-rise development in Costa Mesa in a decade: a 400,000-sf class A office tower in the Two Town Center complex. Last November Koll acquired 8.9 acres in Newport Beach on which it plans to construct a $27 million business park containing 27 owner/user buildings. Opus West currently is seeking pre-lease commitments for its 133,000-sf office project on Jamboree Boulevard in Irvine.

Industrial Vacancies Rise

Orange County's industrial market benefits from its proximity to Los Angeles County, which is the country's highest-performing industrial market and largest port, McDermott says. Yet at the end of 2003, industrial vacancy was approaching 8 percent, the highest level since the late 1990s. Despite a large third-quarter loss, industrial absorption remained positive last year, according to Daum Commercial Real Estate Services' Orange County Industrial Review.

As of last September, 170 sales transactions totaled approximately $600 million, down only slightly from one year previous, indicating continued investor interest in industrial space, according to McDermott. Purchasers comprised a wide variety of owner/users, real estate companies, and private investors. For example, Chandler Real Properties purchased a 35,424-sf complex in Orange from the Olsen family trust for $3.75 million, and Allan Kolsky acquired two buildings in Santa Ana totaling 95,017 sf from 1044 East 4th Corp. for $5.8 million, according to the Daum report. In Irvine, Birtcher Real Estate Group sold two research and development properties -- a 29,058-sf facility to Dolan Construction Co. and a 24,701-sf building to KC Communications -- for almost $5 million total.

In early 2003, there was "some reduction in industrial construction, which is good news because prices were challenged due to vacancies and mergers and consolidations," McDermott says. However, vacancies likely will rise this year as construction activity remains above the 1 million-sf mark, according to the Daum report.

Not Enough Retail Product

An insufficient supply of reasonably priced product combined with a flood of exchange capital has driven overall retail investment return rates down, says Steven C. Kerhart, CCIM, MAI, of Continental Realty Advisors in Irvine. Although small investors aggressively pursued retail properties to exchange for apartments, activity remained flat from 2002, with year-to-date transactions totaling only $400 million as of last September, according to McDermott.

However, positive personal income and retail sales growth contributed to healthy leasing activity last year. Two new community shopping centers hit the market with a combined vacancy of only 15 percent, according to CB Richard Ellis' Retail Market Index Brief. The 695,000-sf Westridge Plaza in La Habra is anchored by Lowe's Home Improvement Warehouse, Sam's Club, Wal-Mart, and Kohl's; Albertsons and Kohl's anchor the 225,000-sf Trabuco Grove in Irvine. Overall asking lease rates remained relatively flat last year, with the Airport Area and South County submarkets commanding the highest rents, the report says.

The Irvine Co.'s Quail Hill Village Center was the only retail property under construction in fourth-quarter 2003. The 150,000-sf neighborhood shopping center, located in Irvine and anchored by Albertsons, Sav-on, and Washington Mutual, is scheduled to open this spring. However, nearly 2 million sf of retail space is in the planning pipeline, according to the CB Richard Ellis report, which may negatively affect leasing and absorption fundamentals later this year.

John R. McAdams

John R. McAdams is president of the John R. McAdams Co., a land development design firm in Research Triangle Park, N.C. Contact him at (919) 361-5000 or [email protected] Managing Stormwater to Maximize Land When East West Partners Management Co. planned Meadowmont of Chapel Hill, its flagship mixed-use community, it sought to optimize the land\'s development yield. The developer followed a master stormwater management plan to comply with Chapel Hill, N.C.\'s regulatory requirements while maximizing the available land. Because the 435-acre project is located within the protected Jordan Lake watershed area, state and local regulations mandated different stormwater quality treatment for different aspects of the development. Thus, the developer divided the site into a high-density commercial area that required stormwater quality facilities and a low-density residential area that did not. The state permitted no more than 70 percent paved surface coverage in the high-density area and no more than 24 percent in the low-density area. Chapel Hill imposed stricter regulations, allowing only 50 percent impervious surface coverage in the high-density area to control pollution in the drinking water supply. To provide water features that met quality and quantity requirements while optimizing the available land, East West Partners approached the development as a whole rather than as individual parcels. Working with a land development design company, the developer located three ponds in high-visibility areas on various parcels that the Meadowmont Owner\'s Association would own and maintain. In contrast, separate stormwater plans for individual parcels might have resulted in 10 or more ponds, compromising available land and increasing both construction and facility maintenance costs. To track impervious surface limitations during construction, the land development design company created an accurate monitoring system that tracked each parcel and individual residential lot\'s paved area, including sidewalks, parking spaces, bike trails, landscape lots, and roads. When parcels were sold or developed, engineers inserted the impervious surface information into a spreadsheet and sent it to East West Partners, as well as Chapel Hill\'s planning department. Results and Benefits The benefits of starting with a master stormwater management plan are numerous, including no wasted land. By knowing the Meadowmont development\'s pond locations upfront, East West Partners could plan around them effectively. In addition, prior to purchase buyers know a parcel\'s precise impervious surface allocations, as well as where stormwater will be directed and the location of each parcel\'s drainage boundaries. At Meadowmont, the developer overlapped the individual basins\' drainage boundaries, allowing buyers the flexibility to build on high-density area parcels without worrying about getting the exact amount to draw to a specific basin. Also, once buyers purchased parcels, they could sell spare impervious surface allocations to other parcel owners located within the same sub-watershed (high- or low-density area), thus maximizing their investment. Ultimately, East West Partners\' potential buyers were better informed to make qualified decisions about development before closing their land purchases. East West Partners maximized Meadowmont\'s available land by implementing a stormwater management and treatement plan prior to development. Credit: John R. McAdams Co.

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