Mission: Possible?



When an investor spent $50 million for a 12-building apartment complex in Orange County two months ago, he said the magic words: “Location, location, location.”

Those are just three of the reasons why Orange County commercial properties are so valued. Two others are proximity to major tourist attractions and the multitude of recreational amenities in most parts of the county.

With a population of 3 million seeking more property for residential and commercial development, serious buyers and renters must start changing the way they approach the real estate market.

“Orange County is still experiencing healthy job growth, and the availability of land continues to diminish,” says Wayne Lamb of CRESA Partners. “For instance, the Platinum Triangle in Anaheim is demolishing old industrial buildings and replacing them with high-density residential, shopping and office buildings.”

Smart Business talked with Lamb and Jeff Shepard, both partners at CRESA Partners, about the present and future of commercial real estate in Orange County.

Is the commercial real estate market in the O.C. a seller’s market?
Lamb:
There are definitely fewer properties on the market, and the most desirable spaces have a lot of competition. Rental rates are going up, and other concessions are going down. One of the things that landlords are realizing is that they don’t have to fund all of the tenant improvements required to move a tenant into a space so more and more tenants are having to self fund.

How does the market affect potential buyers or tenants?
Lamb:
It’s imperative that the real estate consultant prepares budgets in advance of commitments. Also, most tenants have to make quicker, more decisive decisions — but not foolish decisions. Rising costs for tenant improvements, utility costs and increasing rental/lease rates make the market very difficult to predict the ideal time to for a tenant to renew or relocate. Concessions are decreasing, and multiple companies are competing for the same space.

Shepard: Buyers or tenants have to get creative. The real estate adviser needs to provide strong leadership by helping tenants realize that not as many concessions will be granted, so they have to pick the most important ones and focus on them.

Is this tight market a cyclical phenomenon?
Shepard:
I have experienced several up-and-down cycles over my career. The primary driver for a tight market is job growth in relation to the amount of new space being built. If job growth remains robust, then the market will stay tight until landlords can complete enough new projects to ease demand. It typically takes a developer two years to deliver a new project to the market, so expect the next 18 months to remain tight.

How does the market affect the professional real estate agent?
Shepard:
The consultant has to be more focused on every single transaction every single day. The adviser has to over-communicate with every client and be willing to give a strong opinion as to when the right time to act on the transaction and when it’s time to stop negotiating.

Advisers need to be very creative in the strategies they employ to deliver favorable results.

Lamb: A strong professional will have a broad arsenal of strategies and tactics. Each transaction or circumstance is truly different, based on the clients’ needs. People’s leases expire when they expire, regardless of whether it’s a good or bad market, but the professional who truly is looking out for his or her client may want to recommend a short-term solution until the market softens.

Will the commercial real estate market in Orange County remain tight for some time?
Lamb:
Orange County is still experiencing healthy job growth, and the availability of land continues to diminish. The county is transitioning from suburban markets to urban markets. Virtually every submarket has experienced rising rates, skyrocketing land prices and decreasing vacancy — if you can even find land.

Shepard: I think tenants are in for another 18 months of escalating rents and decreasing concessions followed by a stabilizing period. But I don’t think we’ll see a dip in prices or availability any time in the foreseeable future.

WAYNE LAMB and JEFF SHEPARD are partners at CRESA Partners. Reach them at (949) 706-6600, mailto:[email protected] and [email protected].