IRVINE, CA-Most new office listings in the Orange County market are being targeted by seasoned operators searching for value-add deals, reports Marcus & Millichap. These investors are betting on an accelerated recovery pace for the market and are hoping to offer the improved space at an advantageous rent level, Alan Pontius, SVP for M&M, tells GlobeSt.com.
As GlobeSt.com reported earlier today, newly constructed office buildings are coming online completely pre-leased, according to a recent M&M report. The new stock is having little upward pressure on vacancy rates, prompting the question of whether or not a surge in office construction is in the cards for Orange County in the near future. However, Pontus says no.
“We’ve seen that markets across the country—and certainly Orange County would fit in with what’s happening with the rest of the country—are having pretty muted office-construction levels. Despite the fact that we’re seeing a significant jump in construction from where we were in prior years, it’s still not significant against the inventory. There’s still not a tremendous amount of new supply. I don’t think you’re going to see any significant change in speculative office development. I don’t think that this bodes for the future a significant introduction of new spec stock.”
Regarding investor value-add plays, Pontius tells GlobeSt.com, “The investor is saying, ‘I’ve got a recovering economic condition overall, and the Orange County market is recovering, so if I was going to make a value-added play, certainly the prospects going forward are more clear than two years ago when that type of acquisition would have been highly speculative in nature.’ The seasonal point of view is that the recovery is clearly in place, so the investor is making a bet that the recovery pace will accelerate. They’re hoping to offer space at an advantageous rent level against other properties and certainly against new properties.” He adds that this strategy works if the timing is right and if the investor can find available product.
As for any advantages office investing might have over the hot multifamily market in Orange County, Pontius says he believes investor preferences are just that: preferences. “You do have investors that play a multiproduct spectrum, so part of that decision could have to do with weighting—if a portfolio is now overweighed to multifamily, an investor might look to balance it with office. But the other issue goes back to seasonality and cyclicality. If the apartment market is so hot and cap rates are so heavily compressed, the reason I might look to steer my equity into office is it’s further behind on the recovery spectrum and if the economic gains continue and even accelerate, my investment in office today allows me to realize more substantial upside in a three-to-five-year period in office vs. multifamily, where my rental/occupancy upside in a three-to-five-year cycle may not be as extreme.”
Where money is made in office investing is when an investor buys in a cyclical soft period and is able to realize rental gains and capitalize on them, Pontus continues. “Office is more of a capital appreciation play than multifamily that tends to have steadier income streams.”