2016: The Year of the Asset Manager?

IRVINE, CA—Office owners are not going to be able to rely on rent growth, so they will need to focus on value engineering and lease structuring in order to see greater returns on their investment, New York Life Real Estate Investors' managing director Thomas O'Hanlon tells GlobeSt.com. As we recently reported, his firm's recently acquired 18201 Von Karman, a 229,000-square-foot, 11-story, institutional-quality office building here, to be overseen by Greenlaw Partners. We spoke exclusively with O'Hanlon and senior director Chris Hunt about their plans for the property, the Orange County market and the outlook for office investment this year.

GlobeSt.com: What attracted you to 18201 Von Karman, and what types of upgrades are you planning or considering for it?

Hunt: We thought this was a very centrally located, high-profile, high-visibility asset in the Irvine Airport submarket, one of our favorite submarkets in Orange County. It also needed a little refurbishment to add value, so we're redoing the main lobby of the building and the common areas. It was a strike-zone buy for us to come in and take a very well-maintained property and bring it up to a more contemporary standard. The outdoor common areas have already been spruced up by the existing ownership. We will be working on the inside of the building, the lobby and retail.

GlobeSt.com: What appeals to you about the Orange County market?

Hunt: Three things: 1. It's a pretty well supply-constrained market; 2. It has a very highly educated workforce; and 3. Right now, it is showing very strong job growth. Orange County came out of the cycle a little later than San Diego and L.A., and we think we're getting it as it really starts to accelerate into a fully job-based economic recovery. It also has a really nice diversified employment base with strength in engineering, aerospace and technology without being over-weighted in any of them.

GlobeSt.com: What does your firm look for when acquiring office properties?

O'Hanlon: Obviously, every market is different. The Bay Area is exceeding a lot of previous benchmarks in terms of pricing and rents, but as we look at the US economy as a whole, when we're honing in on a particular submarket, we're looking at the asset and saying it's got to be below replacement cost. That's the first step—we don't want to be buying things dramatically above replacement cost. But, we also are focused on our exit strategy, so we have to have a realistic exit price. If we see a market is getting a little too frothy and prices are dramatically above long-term replacement costs, that won't do. Also, relative to the long-term trend, we look at the rent-growth forecast for a particular market and try to determine whether there may be some choppiness ahead of us in the long term.

GlobeSt.com: What is your outlook for office investment in 2016?

O'Hanlon: As the economy moves toward full employment, those subsequent wage gains are going to benefit all property types. They will benefit the consumer, and this will spill over into several different asset classes. Property pricing is causing investors to move out on the risk spectrum in both property and market (secondary markets), so 2016 is going to be a difficult year to gauge relative value. Over the next few years, it will be critical to implement a lot of these value-add strategies on asset that people have been purchasing over the last 12 to 18 months. Owners are going to really have to battle to create a product that will stand out and attract tenants, and their needs relative to their neighbor doing the same. This is going to be the year of the asset manager really implementing the strategies put upon them. They're not going to be able to rely on rent growth, but instead on implementing these strategies, from value engineering to longer lease terms. That's really what we're looking at.