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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.