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‘Covid Has Wiped Out Mediocrity.’ Orange County Investors Rethink Post-Pandemic Portfolios

Of the four main commercial real estate food groups — industrial, multifamily, office and retail — the pandemic drew a line between the winners and losers. 

Those in industrial and multifamily will continue their winning streak this year with double-digit rent increases in Orange County, while there are signs of optimism in the latter groups — office and retail — for those investors who fill a need in the market, according to panelists at Bisnow’s Orange County State of the Market event Thursday. 

Allen Matkins partner Sandy Jacobson, Innovative Housing Opportunities President and CEO Rochelle Mills, CapRock Partners First Vice President of Acquisitions Taylor Arnett, The Bascom Group Managing Partner Jerry Fink

“The office isn’t dead,” Shopoff Realty Investments CEO William Shopoff said during the Thursday event. The commercial investor has been less active on the office front and more active on multifamily over the past five years, though the firm did make an office move of its own this year. 

It just moved into the Boardwalk office development in Irvine, a modern, 550K SF property on Jamboree Road that delivered in 2018. 

While not dead, or even near global financial crisis levels, the OC office market certainly has taken a beating, with demand down 34% from pre-Covid levels, according to a Q4 2021 Avison Young market report

Office investors that rethink their portfolio to cater to the needs of growing industries in the county — namely, life sciences — may fare better than the overall market over the next few years, Harbor Associates principal Rich McEvoy said. Harbor last year acquired two Aliso Viejo office buildings, part of The Summit office campus, for $92M, and has been converting the spaces to accommodate life sciences tenants, a sector that has seen burgeoning growth across the country over the past several years.

“There is an emerging hub of life science companies in Aliso Viejo, and it’s a big growth area in the overall OC market,” McEvoy said. 

In addition to building for prospective tenants, office investors and employers must invest in upgrades to lure employees back to the office. 

“We need to give employees a reason to be there,” McEvoy said. 

Another hammered commercial sector, retail, is in a state of reinvention in the wake of the pandemic, which only accelerated challenges for brick-and-mortar retailers. 

“Covid has wiped out mediocrity,” LAB Holdings President and CEO Shaheen Sadeghi said. 

Sadeghi has been at the forefront of unique retail uses for several decades; the investor has been analyzing the evolution of the American mall since the 1990s, and he refers to his Orange County retail developments like The Lab in Costa Mesa and the Anaheim Packing District as “anti-mall” developments. 

New American subcultures reflect new shopping behaviors, such as the vast proliferation of farmers markets in Orange County, Sadeghi said.

“These subcultures need a new platform, because they’re not going to sign a traditional lease at a mall,” Sadeghi said. “I think micro-manufacturing is the next generation of retail, with small businesses driving the trend.” 

Moderator Daniel Gehman of Irvine-based Danielian Associates compared the trend to the increase in retailers that start out of Etsy, and then open brick-and-mortar locations.

Danielian Associates principal Daniel Gehman, Shopoff Realty Investments CEO William Shopoff, LAB Holdings CEO Shaheen Sadeghi, Harbor Associates principal Rich McEvoy, Hillmann Consulting partner Brandon Clements

Meanwhile, the multifamily and industrial sectors continue to see record gains in occupancy and rent figures, with no slowdown in sight. 

“With the incredibly low vacancy rates we are seeing in multifamily, you’re going to see double-digit rent growth for the next couple of years,” Jerry Fink, managing director of apartment investor The Bascom Group, said during a different panel. 

There is particular demand for more affordable housing construction.

“There’s no slowdown in sight for affordable housing,” according to Rochelle Mills, president and CEO of Innovative Housing Opportunities. “The need is just too great.” 

As for industrial, rents are climbing higher than brokerage reports indicate, according to Taylor Arnett, first vice president of acquisitions at CapRock Partners

“Reports have said that industrial rents are up 22%, but for Class-A properties, it’s closer to 40%,” Arnett said.