High Rise Office Market
Posted:
August 18, 2003
The Orange County high-rise
office market rebounded in the first half of the year, posting more than 600,000
square feet of positive net absorption.
Along with increased leasing activity, the investment market remained strong
with several high-rise office buildings selling or coming to market in Central
County and the greater John Wayne Airport area during the period.
Four class A high-rise buildings have changed hands this year for more than
$260 million collectively. Six more buildings are either in escrow or coming
to market with a total value of more than $250 million.
Institutional and private investors remain active. Their interest is due in
large part to lower returns from alternative investments vehicles, a historically
low interest rate environment, limited new construction activity and the county’s
ranking as a top area to live and work in the U.S.
Many investors believe economic forecasts, which predict continued vigorous
population and employment growth in OC in the next two decades, will outperform
and provide economic stability not found in other U.S. markets.
A positive economic trend will have the greatest impact on the greater John
Wayne Airport area given its profile as the “Central Business District” of OC
containing about 48% of the county’s office space is in this area.
While most U.S. markets have seen increases in vacancy, the county’s high-rise
office market posted a 3.5% decrease in the overall vacancy rate in the past
year.
With the OC office market moving back to positive absorption, office leasing
brokers and many investors believe vacancy rates will continue to decline—assuming
supply remains constrained. That will cause tenants to accelerate their deal-making
timeline before rental rates adjust upward.
Investors see this as an opportunity to take ownership of assets with a mixture
of stability and near-term rollover risk to capitalize on the potential rent
growth expected in the next three to five years. Increased absorption and a
rise in rental rates should help offset recent and future increases in interest
rates.
On the supply side, construction activity has stopped with no new developments
set to break ground in the near term.
Restrictions resulting from Measure S on office development in Newport Beach
and Irvine’s proposed annexation of the former El Toro Marine base for development
of mostly open space and residential building is a boost for property value
appreciation for existing high-rise office properties.
Several large high-end condominium and apartment developments are under way
or planned in locations originally set for office development, which will eliminate
new competition to existing office space.
With a limited number of high-rise opportunities for investors in office buildings,
they are becoming increasingly more aggressive in their underwriting assumptions.
This, coupled with the favorable debt environment, makes for a very competitive
market providing sellers with multiple bidders.
Southern California remains one of the top three markets for office investment
in the U.S. and will continue to see sustained interest.
OCBJ - August 18 2003
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