OC Office Market Headed for a Record Year

Orange County is headed for a record-breaking year of office investment sales volumes. According to CBRE, Orange County office investment could hit $3 billion or $3.5 billion this year, a record number for a market that typically ranges from $2.5 billion to $3 billion. The first quarter of the year surpassed sales volumes in the first quarter of 2018 and several office assets are expected to come to market that will likely push sales volumes past the $3 billion mark this year.

“2019 is off to an encouraging start.  Between properties that have already sold and/or are in escrow we are on pace to surpass where Orange County was in Q1 of 2018,” Anthony DeLorenzo, EVP at CBRE, tells GlobeSt.com. “What’s more impressive is the amount of properties and scale of the assets that could be coming able for sale in 2019.  If projects and hold true Orange County could see more than $3 billion properties for sale in 2019. The real questions for Orange County isn’t about whether or not the product will be there, but rather who are the buyers going to be for this potentially historic level of trade volume.”

Office assets are trading hands for record prices, a sign that we are hitting the top of the cycle, and it is encouraging office owners to sell. “As we are over 10 years into the cycle, owners are looking to capitalize on peak pricing, while buyers are looking to lock in favorable interest rates,” says DeLorenzo. “The 10-year treasury just hit its lowest level since 2017, giving buyers more room to be aggressive on their offers.”

Like much of Southern California, Orange County also recovered from the recession later than other primary markets. The late recovery has delayed the office market peak. “While many of the other Western US market recovered rather quickly and saw property values rebound in 2014-15 Orange County lagged,” adds DeLorenzo. “That delay in the OC recovery pushed some of the repositioned assets back a few year. Its now time for some of those properties to be cleared.”

Although pricing is hitting peak levels and more significant office assets are making their way to the market, private investors have been the most active capital source in the Orange County office market. “Private capital has steadily increased in Orange County over the past five years,” DeLorenzo says. “In 2014, private investors made up a quarter of the buyers in the Orange County Office market. Thus far in 2019, they have comprised nearly half of the buyers of office properties.”

These investors have targeted value-add deals, but there are becoming fewer redevelopment opportunities in the market. This year, DeLorenzo expects more core assets to come to market. “There aren’t many true value add opportunities in the market for slated for sale in 2019,” he says. “So many owners who are thinking about selling their properties in 2019 have taken steps to make their properties appeal to value-add capital. Outside of the type of properties/strategy the most desirable markets for investment continue to be South Orange County, the Irvine Spectrum in particular and the Greater Airport Area.”

This year, the office outlook is rosy, but next year could be a different story. “Next year we will again find ourselves in an election year and one year longer into the cycle,” DeLorenzo says. “We might also find ourselves still trying to clear assets that launched in 2019 but might have not found a buyer. If one thing is for sure 2020 is going to be interesting.”