OC Deals Should Top $300M for Q1

ORANGE COUNTY, CA-For the first time since the market's peak in 2007, Orange County's office transaction volume exceeded $1.1 billion in 2013, which is on pace with San Diego, reports CBRE. As capital and transaction volume shifts from San Francisco, Silicon Valley and Seattle to Southern California and capital is underwriting significant rent growth in Orange County in the next three to four years, GlobeSt.com caught up with two CBRE investment brokers, Paul Jones—who concentrates on transactions in the $15 million and up category—and Anthony DeLorenzo—who focuses on deals including and below $25 million—to get their take on the market and what 2014 holds for office investment in Orange County.

GlobeSt.com: What is going on in Orange County to warrant such strong transaction volume last year?

Jones: The capital markets are outpacing the fundamentals still in Orange County. There's more capital going to place money in Orange County than deals available, which makes for a very competitive environment. Several groups are underwriting in Orange County, which is driving up prices. We're slowly seeing rent growth from the Irvine Co. in South Orange County, and also from Blackstone.

DeLorenzo: Capital, especially on the bigger deals, has really been focused on Seattle, San Francisco and L.A., but if you look at Orange County now, it is by far and away forecasted to increase the most rental-wise over the next five years—we're forecasting a 30.2% increase here. San Francisco is next at 25.6% and all of Southern California is between 16% and 22%. If capital has Southern California in its sights, Orange County is probably its best bet. There's also more growth on a price-per-foot basis in Orange County than in other markets, as well.

GlobeSt.com: How are investors viewing this market as move further into the recovery?

Jones: Blackstone and CB investors are buying stuff all across the country—including San Francisco and Seattle, which are pricy—but they look at Orange County as class-A, steel-frame construction they can buy for $250 a foot, and it costs $400 a foot to replace, so why not buy in Orange County? It has historically been a great place to live and to work, so it's almost a no-brainer.

DeLorenzo: During the high-water mark of 2007, Orange County was responsible for a quarter of the transactions in Southern California that year. Last year, Southern California saw almost $11 billion of office transactions, and Orange County only contributed to about 12% of them. That's not to say we'll get back to 25% of office transactions, but I would expect to see Orange County contribute to more than 12% to 15% of total dollar volume of sales in Southern California.

Jones: From what we know is scheduled to close in the first quarter alone in Orange County—north of $200 million, and carryover deals will put Orange County over $300 million this quarter—we've had a really good start to Orange County. If you went back and looked, we seem to mimic San Diego. Our fundamentals are similar to San Diego. After 16 consecutive quarters of positive absorption, Orange County is still positive, but is close to having a negative quarter. We finished the year at 900,000 square feet, and we were hoping to be over a million. The Capital markets are still outpacing the fundamentals, but capital is very, very aggressive. There is a long-term bet on this market.

GlobeSt.com: How do you think the deals will be concentrated throughout the year?

DeLorenzo: Historically, most deals occur in the third and fourth quarter, so I wouldn't expect to see anything different this year.

Jones: Every year starts out a little slow in January. Tustin Executive Center is the only known deal hitting the market in Orange County in the next 20-30 days (although this will change). But for the first time, we have a significant amount of carryover deals from last year expected to close in the first quarter, so we're starting off on the right foot.