Retail Near Office Will Draw Tenants

ORANGE COUNTY, CA—As the live/work/play trend grows, expect retail properties located close to office properties to see higher occupancy levels in Orange County moving into 2015, Jared Dienstag, senior analyst—research with Cushman & Wakefield, tells GlobeSt.com. We spoke exclusively with Dienstag about the office and industrial investment market in Orange County, why it appeals to foreign investors and emerging trends he sees for the year ahead.

GlobeSt.com: What opportunities in office and industrial investment are unique to Orange County?

Dienstag: Orange County has a strong supply of both leased-up and value-add properties, which provide opportunities for all types of investors. With fundamentals improving in the office and industrial markets, one set of investors is attracted to stabilized properties, while others are drawn to highly vacant buildings and the potential upside that they bring to the table. Due to strong market fundamentals, investors targeting value-add properties are willing to invest in capital improvements to help lease the buildings more quickly because their confidence in tenant demand has risen. Orange County is home to one of the best demographic bases in the country, including a highly educated and skilled workforce across a wide spectrum of industries. Investors understand that with a strong labor pool, a countless number of companies will always want to have operations in Orange County, which provides favorable conditions for tenant demand.

GlobeSt.com: What draws foreign investors to these sectors in this market, and how long will this interest continue?

Dienstag: Orange County has a rich history of producing strong returns for investors. In recent years, foreign activity in purchasing residential properties has increased, giving these investors residences in Orange County. Many of them split their time between living in their native countries and here in Orange County, providing them the opportunity to become familiar with the local markets. Some of the more active investors will set up a local operations base, which allows them to have their ears to the ground and be on top of the current market trends. Specifically for office properties, class-A core properties are very attractive to foreign investors, and the purchase prices are more favorable in Orange County than Los Angeles. This trend is expected to carry on at least throughout this current market upturn.

GlobeSt.com: What impact will a potential rise in interest rates have on the local market in the second half of 2015?

Dienstag: Interest rates can affect commercial real estate values in multiple ways. It's a common notion that when interest rates rise, cap rates of commercial real estate properties will also rise, thus devaluing properties. While this may occur if interest rates increase, there are other factors to take into consideration. When changes occur in interest rates, it is important to understand what is causing this to happen. When interest rates rise because the economy is improving, there are variables in commercial real estate to act as a buffer and help keep property values from declining. In a market such as Orange County that has commercial real estate occupancy rising along with escalating rental rates, strong cash flow generated from income-producing properties can help offset increasing interest rates. Commercial properties located in strong real estate markets such as Orange County that historically produce healthy net operating income and low cap rates are usually able to withstand a change in the tide of interest rates better than markets that generate lower returns. While not always the case, a rise in interest rates can affect short-term investments more than long-term. Properties with strong cash-flow growth are better suited to counterbalance unfavorable changes in rates.

GlobeSt.com: Which trends do you see emerging in this market for the next year?

Dienstag: Both the office and industrial markets are projected to continue to experience positive growth into 2015. With well-leased class-A office properties currently selling near and in some cases at peak market prices, rental rates will need to remain on the upswing to support rising sales prices. We should expect to see growing office fundamentals boost occupancy of retail properties located near office hubs as demand increases from office tenants to be conveniently located near a mix of retail amenities. Many retailers strongly value population in their site-selection process, so improvements to the office and retail markets will benefit both sectors.

As industrial users' space requirements evolve and become more sophisticated, a greater number of older industrial properties will become obsolete. Landlords will need to renovate—and in some cases demolish old and construct new buildings—to remain competitive and attract users to their properties. With industrial vacancy at a near-record-level low point and available land becoming scarcer, modernizing current and developing new properties will provide conditions for greater user activity.