By: Joshua Ohl, CoStar
The Orange County office market is coming off one of the strongest years for investment volume this cycle, posting more than $3 billion in sales with the average cap rates below 6 percent.
That’s just off 2015’s peak year for performance, when cap rates averaged nearly 6 percent and volume hit $3.2 billion.
Last year is notable for its third quarter deals, with more than $1.2 billion trading (the biggest quarter this cycle), buoyed by the $442 million Broadcom deal. While it is unclear whether there are any similar mega-deals lurking in the shadows, 2018 came out of the gate roaring, posting the strongest first quarter in volume this cycle with more than $500 million in investment.
Unlike other sectors in Orange County, office investors have shown little hesitation placing their money here. Investment volume was down in the other groups compared to 2016. The apartment market saw a 25 percent decline in volume last year while the industrial market notched an 11 percent drop.
While multifamily investors have come out strong in 2018, posting a 20 percent improvement in first quarter of 2018 compared to the first quarter of 2017 (office was up 30 percent), the industrial sector saw a further pullback, falling 50 percent versus the first quarter of 2017.
Office towers receive all the attention here, and rightly so - they move the needle.
For instance, City Tower sold in March for $147.3 million ($342 per square foot) at a 4.9 percent cap rate. Vacancies have hovered near 20 percent since 2014. But it might be the smaller properties that are the darling of the investment class.
Buildings less than 20,000 square feet have averaged selling for $325-per-square-foot over the past four quarters, almost $75 per-square-foot more than for 100,000-plus-square-foot properties. Cap rates, too are substantially lower. They’ve averaged close to 5 percent in the last year compared to nearly 6 percent for big buildings.
Regardless of the office asset, big and small properties alike continue to receive heavy interest from investors. For those looking for Southern California exposure, and steady cap rates, Orange County has gained the confidence of investors.