Orange County fundamentals continue to be strong across the board. The area’s diversified economy, ideal climate and infrastructure provides an attractive location for companies and their employees. Employment remains strong, with the overall unemployment rate at 4.2 percent (as of September 2017) helping keep occupancy, leasing and capital market activity robust.
Both debt and equity interest in Orange County remain strong with no lack of capital options across the spectrum. As an example, Five Point Gateway, a four-building office/R&D campus in Irvine, received tremendous interest from multiple capital sources, ultimately being financed with $339 million in debt fund capital. Construction financing, while challenging as regulations continue to lessen bank appetite, is available for the right transactions. Phase I of FLIGHT at Tustin Legacy, a 470,000-square-foot creative office campus located in Tustin, California, recently received construction financing, with construction expected to be complete in early 2019.
Transaction volume is on pace to easily exceed last year’s volume and greatly attributed to the strongest third quarter in more than a decade. Private investors continue to show a strong appetite for Orange County office acquisitions with no hesitation across risk spectrum or dollar amount. Recapitalizations have been prevalent as the formation of new joint venture partnerships reset the property price basis, and owners take advantage of the ideal capital markets environment. With the Orange County office market trading significantly below replacement costs, it continues to be viewed as an attractive investment opportunity when compared to other coastal California markets.
Although construction costs have soared to new highs ($550 to $600 per square foot) in 2017, office development in Orange County has experienced a significant increase in the last 24 months. Twenty-seventeen is projected to be the largest this cycle with new deliveries accounting for one percent of total inventory. Although noticeably less than the 3.5 percent delivered in 2007, the shift in office use employment has altered the type of product delivered. New trends, including co-working space, have resulted the shift to high-utility/multi-functional “creative” space with generous outdoor working space and onsite amenities. The Spectrum has arisen as a focal point for Orange County’s office growth highlighted by Irvine Company’s addition of almost 1.5 million square feet.
The Orange County office market demonstrated a strong first half and continues to be a landlord’s market as availability rates remain low due to positive net absorption numbers. Year-to-date net absorption was nearly five times what it was in 2016, which can be attributed to multiple 100,000-square-foot leases being signed throughout the strongest submarkets in Orange County. Behr Process Corporation has signed the largest lease year to date with more than 225,000 square feet in the Greater Airport Area, and the fast growing cybersecurity company Cylance is making a new home in the recently completed 400 Spectrum Center building, the tallest building in Orange County, where they will occupy six floors at just over 130,000 square feet and take top signage.
John Chun is a director in the Orange County office of HFF. He is responsible for originating debt and equity placement transactions throughout the western United States. Throughout his career, he has originated and/or executed on a broad range of real estate transactions, including office, industrial, retail, multi-housing and land. He has been involved in excess of $1.5 billion in commercial real estate transactions throughout his career.
Mr. Chun joined the firm in August 2011. Prior to HFF, he worked as an investment director for a regional commercial real estate equity fund focused on opportunistic and value-add investments throughout the western United States. He also oversaw $1 billion in services as a senior business analyst at a Fortune 500 company, and was involved in more than $2.2 billion in equity, debt and strategic advisory transactions as a corporate finance analyst at investment banking firm Lehman Brothers Inc.
Derreck Barker is an director in the Orange County office of HFF with more than 10 years of experience in commercial real estate. He is primarily responsible for originating investment sales transactions with a focus on office in both the institutional and private client sectors. Throughout the course of his career, Mr. Barker has been involved in the sale of more than $2.4 billion in commercial property transactions in Southern California and Arizona.
Mr. Barker joined the firm in February 2013. Prior to HFF, he worked with Marshall Property & Development where he focused on the acquisition and asset management of investment and development opportunities in Southern California and Arizona. Mr. Barker also previously worked at Opus West Corporation assisting in the development of notable Southern California office, retail and multi-housing projects.
Originally published in Western Real Estate Business magazine.