Office Investment Jumps 130% in Orange County
Orange County was home to three of the top office transactions in Southern California in the third quarter.
“The Orange County office market grew at a healthy pace in the third quarter, based on the strength in the economy as employers continue to expand,” Doug Ressler, director of business intelligence at Yardi, tells GlobeSt.com. “We see growth is stronger than it has been in nearly a decade.” Ressler adds that Orange County is the most “dynamic business sector office market in the L.A. Basin.”
While investment activity has increased, Ressler was still cautious about the future of investment growth. “The office market is at risk because the SoCal area employment is significantly below the national average,” he says. “The pace of expansion is still considerably slower than in past times of economic growth, and co-working density maximize space but hinders new development.”
While investment activity increased in the third quarter over a slow first half of the year, investment activity is down compared to 2017 volumes. “Low volume of move-outs tied to earlier consolidation shifted vacancy slightly up in CBD markets,” explains Ressler about the difference between the two years. “We believe the negative absorption is temporary and will be counter balanced in coming quarters as leasing activity will adjust to market conditions.”
By comparison, Los Angeles office investment activity has also been slow this year compared to 2017. However, Ressler says that both class-A and class-B office assets are gaining momentum. In Los Angeles, Equity Office had the top transaction of the quarter in both Los Angeles and Orange County with the $628 million sale of its 18-property Santa Monica Business Park portfolio and the $200 million sale of a 7-property portfolio in Newport Beach and Irvine. Ressler says that these top markets will continue to produce strong investor activity. “The most desirable Los Angeles submarkets continue to show they can handle the increase in prices, however price increases leaking into less stable submarkets around the region could be a concern,” he says, before cautioning; “watch for sublease space being an indicator as to potential stress on the markets.”
Next year, inflation and Fed policy are Ressler’s big concerns in terms of office investment trends. “GDP growth is running above the inflationary trend and is scheduled to fall back to its longer-run rate by 2021, even as inflation is not expected to accelerate beyond the Fed’s target,” he says. “With no acceleration in inflation, what impact will five additional rate hikes have? Fed policy and inflation may have a dramatic effect in the next 18 months.”