IRVINE, CA—The office and industrial recovery should continue for at least the next 24 months as the economy improves and more investors than ever are interested in this market, Kurt Strasmann, senior managing director for CBRE, tells GlobeSt.com exclusively. We spoke with Strasmann about the two sectors, the biggest challenges and opportunities lie ahead in 2015 and the face of the investment market.
GlobeSt.com: What do you see as the biggest challenges the Orange County office and industrial markets will face in 2015?
Strasmann: In office, one of the challenges is tenants catching on that rents are going to move pretty quickly and are going to ramp up. Tenants who have heard about the market recovering, who have not been in the market, when they go to renew or acquire additional space or expand will get sticker shock and will have to get comfortable with that.
In industrial, we have the second-lowest vacancy in the nation at under 3%. It has been an ongoing challenge for tenants to find quality space. When space comes online, it gets multiple offers from multiple users, which typically results in price and value appreciation on the leasing side. On the sales side, it's a challenge because of the lack of quality space available for people who want to expand. Orange County is more of an infill market, and there's not much space available for developers to develop—it's being gobbled up by the multifamily market.
GlobeSt.com: What do you see as the markets' biggest strengths and areas of opportunity for commercial real estate?
Strasmann: Certainly the biggest strength is that the economy is recovering very nicely. If you look at the recovery, it's been very diversified. Initially, it was good for corporate America—the net absorption and big activity was coming from big business leasing up space. But it fully diversified into mid-level companies and then to small businesses, and that's terrific news. Also, job growth looks solid for 2015, and price and lease appreciation will be seen, so we've got terrific fundamentals for CRE to move forward.
GlobeSt.com: How would you characterize the development sector for these markets in 2015?
Strasmann: For office, I haven't seen development in a long time. The Irvine Co.'s Fashion Island office space of 300,000-plus square feet is leasing up, and next is spec office development in the Irvine Spectrum, which also shows strength in the overall market. We will see two to three purely spec office developments in Orange County, not just from the Irvine Co. We see vacancies decreasing and developers seeing an opportunity to get in and develop. There will be some very significant plays moving forward in big-size development, and we will see more of the redevelopment of traditional office into creative office.
In industrial, when it's available, developers are moving in very aggressively and are paying premium pricing. We've had excellent activity, low vacancy and a good economy, and they see that. It's difficult, though, because of the infill location that competes with other developers—mainly multifamily. The fundamentals are great for that sector, and industrial is losing 1% of its space to multifamily per year. The fundamentals look good, but it's hard to find opportunities moving forward.
GlobeSt.com: What changes do you foresee in the investment market for these sectors in the coming year, whether in terms of types of investors, where they will be investing or how much they will be spending?
Strasmann: All of the traditional investors are still there—institutional and private capital—but foreign investors have really come into play, particularly the Asian investors. There's an overabundance of investors trying to get into the Orange County market because of the fundamentals: it's a great place to live, there's a diversified economy, there's job growth, and that's the reason why people are coming here. It's the best in the nation for those factors, but not much is available. Still, these investors have to compete, and they are really stretching their underwriting and paying premium pricing for a good reason: there's a lack of product and heavy competition from all sectors.
In 2015, we'll see a rise in interest rates—most are expecting it in the second half of 2015. In theory, we would see properties losing value because of that, but that will not be the case in Orange County because of strong rental growth, lack of product and an abundance of investors trying to get into the market. For the next 24 months, Orange County has a great thing going. The recovery will continue very strongly for at least that amount of time.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.