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Weak Rents Don't Faze Investors

Orange County Office

The Orange County office market has recovered from the worst of the recession, with vacancies down and investors interested again. But rents are still a little slow to appreciate in many parts of the county, according to the panelists at Bisnow’s third annual Orange County State of the Market late last week. 

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Investors are coming from all over to look for OC office properties, the panelists say, believing that revived leasing is bound to drive vacancies down more, and give rents that upward momentum that’s been missing in most places since before the recession. (Rents in OC are like a modern-day Sword in the Stone, people come from all around to lift them.) More than 450 real estate pros came to the Hotel Irvine to hear our panelists.

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USAA Real Estate Co western region managing director Steve Ames says that his company loves Orange County, but it isn’t acquiring assets here right now, because it’s hard to make office deals work. Rents are still lower than they need to be, and investors who buy now are betting on future rent growth momentum. (Like how that Dutch soccer team signed a two-year-old boy last week.) Overall, though, the last few years have been a time of growth for USAA, he adds. The Texas-based company was in a fortunate position at the onset of the recession, having sold a number of office assets in the mid-2000s, and enjoyed relatively low debt levels, and so it was able to use the time to grow its platform.

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Greenlaw Partners principal Wil Smith says that the recession gave stronger investors the chance to buy well-located assets at a good basis, but now it’s tougher—there’s a lot of equity looking for a home, and the competition is a lot stronger than in 2009 and '10. But it’s still possible to find deals. He agrees that in the Orange County office market, lack of rent growth is still a problem in underwriting deals. Rents are going up, but it’s impossible to say how much or how fast. (What if we did a seance to ask the spirit world?) It might be six months or 12 or 24 before they’re where they need to be for underwriting deals.

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Meridian Capital Group managing director Seth Grossman says lenders are aggressive right now, which has made acquisition and development easier—if you can find those deals. Out-of-market lenders love the idea of Southern California, but sometimes they don’t realize the differences between the submarkets in this part of the country. (It's like a puppy, everyone wants one, but not everyone realizes the responsibility.) Orange County might get preferential treatment just because it’s on one of the coasts. Still, it’s a strong market, and a good place to place debt

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Swinerton Builders VP Dave Callis says his company looked into vertical markets to support itself during the recession, such as aviation, healthcare, education, and data centers—and it worked. Now the company has a $1B in backlog in SoCal alone. Orange County has lagged nearby markets in construction velocity, as those markets see a number of large, mixed-use projects with heavy residential components near transit hubs and amenities. (Not that we're jealous or anything.) The development near the Anaheim transit center is the closest OC has to that. Also, there’s a lot of repositioning and adaptive reuse in SoCal, especially into creative office space, but OC doesn’t have a lot of those opportunities.

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LBA Realty VP Eric Brown says he believes the Orange County office market is posed for rent growth in the near term. Park Place—which his company bought it in '09 and renovated aggressively—is now attracting tenants looking for creative space. He explains they wouldn’t have considered Park Place as it used to be, which was a more conventional office property. But now two out of three prospects are pursuing creative space there, such as remodeling site Houzz.com, which opened its OC office in Park Place 18 months ago. In creative space, he says, some features are more expensive, such as the ceilings and specialty lighting, but that’s offset a little by open space layouts, which are less expensive.

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Newmark Grubb Knight Frank EVP Greg May moderated the panel, noting that he’s bullish on Orange County. In 20 years in real estate, Greg’s been consistently a top-producing OC broker, involved in transactions in excess of $870M, and the sales and leasing of more than 14M SF. In our next edition, we’ll cover the State of the Market’s industrial panel.