managers—are driving up demand for the
former, while many high net worth private
investors and developers are seeking value-
add opportunities through the acquisition
of bank and lender REOs or notes.”
The capital markets recovery is another
factor behind the rapid rise of OC prices,
points out Fried. “Some of the first trades
in the beginning of the cycle were pur-
chased on an all-cash basis,” he says. “As
the markets improved, investors increased
the price they could pay for investments as
they began to include assumptions for
debt in their underwriting.” Lenders’
growing eagerness to finance quality prop-
erties in Orange County has continued to
fuel demand as well, he adds
Interest is especially strong in the office
market, according to Voit’s Vittone, and
that interest is remarkable in light of how
the OC office market fared when the latest
boom cycle went bust. The local office
market was hit sooner and harder than
most other regions because so much of its
office space was leased to subprime lend-
ers and companies. When they went south
they vacated huge amounts of space.
Investor interest today is strongest in
class A product, according to Vittone.
“Institutional demand for value-add or
core office investments is driving the sales
market here in Orange County,” he says.
“Buyers of this product have been getting
aggressive about leasing in the hope of
stabilizing occupancy as soon as possible
and exiting the property.”
Fried says one attraction for investors is
that, despite how bashed and battered it
might have been during the worst of the
recession, Orange County benefits from
high barriers to entry for new develop-
ment and improving macro-economic
indicators. While many of the transactions
are being marketed by brokers, savvy inves-
tors are also trying to find the off-market
or closely marketed deals that are being
brought to select firms by distressed sellers
and lenders.
Yet another reason behind investors’
faith is the diversity of the county’s job
base along with the relatively low percent-
age of jobs that are government-related,
says Irvine-based Jay Carnahan, managing
partner of Orion Property Partners Inc.
“Professional and financial services com-
panies, along with technology, bioscience
and engineering firms, have stabilized
from the recession,” says Carnahan. “They
are growing and positioning themselves
to take advantage of one of the all-time-
high vacancy rates.”
A combination of tenant appetite and
landlord incentives is fueling the office
demand, adds Fried. With lenders taking
assets back and owners recapitalizing their
equity, “new owners are entering the mar-
ket at reset bases, enabling landlords to
provide tenants with attractive lease terms
with large T.I. and free rent packages.
This, in turn, has led to an increase in
office demand and leasing.”
The Downtown Los Angeles office market declined as the trend of downsizing and renewing leases continued, says a Q2 report from Transwestern. Furthermore, the departure and
dissolution of law firm Howrey LLP negated gains from new move-ins and expansions for the
quarter, says the report.
According to Transwestern, Downtown L.A. still attracts out-of-market firms, largely
because of the business tax holiday, attractive amenities and accessibility to mass transit. For
example, Zurich Insurance signed a lease to move its operations from Glendale during the
second quarter, and director Michael Bay’s production company, the Institute, signed a lease
relocating its operations from Venice.
Transwestern reports that while businesses are relocating to Downtown, existing tenants
have continued to downsize as their leases rollover. This “will offset much of the positive
effects of firms relocating into the market, putting a damper on Downtown Los Angeles’ recovery,” Transwestern says.
In terms of the investment market, a joint venture of Morgan Stanley Real Estate and
Lincoln Property Co. acquired the 950,000-square-foot headquarters campus of engineering
firm Parsons Corp. in an off-market transaction this past July. Although terms of the sale were
undisclosed, sources not involved in the transaction say that the buyers paid $320 million for
the Pasadena-located property, which the engineering firm has leased back for 15 years.
According to vice chairman Kevin Shannon of CB Richard Ellis, who represented the buyers,
the deal is part of a larger trend in which office sales volume in Los Angeles is gaining traction.
Compared to all of 2012, which saw $1.531 billion in transaction volume, the total for the first
six months of this year, including the Parsons sale, was already at $1.538 billion.
As for the San Diego office leasing market, according to Grubb & Ellis, tenants continue to
have a very heavy hand in all negotiations. “These tenants are typically moving up in space
class (C to B and B to A),” says a report from the firm’s San Diego office. “Additionally, they
continue to take advantage of market conditions to attain premier product with features such
as high parking ratios, better images and stable ownerships that can provide improvement
allowances and long-term security.”
Grubb says that office users also continue to take their time to ensure they see the most
options. Because eliminating a move effectively lowers costs, “lease renewals are also still
more frequent than new deals.”
In addition, according to the brokerage firm, short sales, REO sales and note sales have
become increasingly frequent. “Owners that held on to properties are beginning to let them
go, and new money is picking up where past owners left off,” according to the Grubb report.
“Several of these assets have helped the leasing market, as new incentives, stable ownership
and reduced pricing are introduced into the marketing of the property.”
Jon Walz, executive vice president of debt and equity finance at Grubb, says that on the
investment side, much of the office market is likely overleveraged. “Prior to the national reces-
sion, the majority of office buildings in San Diego had attractive financing,” he says. “In today’s
market, with demand and lease rates down roughly 25% to 30% since that time, not much is
transpiring in the investment market with low, albeit slightly improving, demand.”
Donald Mitchell, a managing principal in CresaPartners’ San Diego office, says that the
availability of debt capital at attractive rates has provided more opportunities to buyers, who
were focused on chasing distressed assets but have become “frustrated with the process
and are beginning to pursue more ‘available’ purchase opportunities,” he says. “Sellers have
become more realistic to market values and thus we are beginning to note mitigation in the
prior polarization of sellers’ expectations and buyers’ expectations.”
L.A., SAN DIEGO OFFICE MARKETS SIDE-BY-SIDE
