Orange County’s Strong Job Growth Provides Market Stability And Durability

Expectations for the year dominated discussion for the development panel speakers at Bisnow’s Orange County State of the Market event, with Allen Matkins partner Sandy Jacobson (below left) asking panelists what they think is happening in OC.

TruAmerica’s senior managing director for acquisitions Greg Campbell kicked off the discussion. With a shortage of housing, he expects to see moderate rent growth of 3.5% and vacancy across the county of about 2% to 3% for Class-B and C assets and closer to 4% for Class-A. “This is good for owners, but it’s a tight market for residents looking for opportunities to move,” he said. Greg also brought up the problem of affordability.

“It’s a chronic problem in OC, because there’s not enough units to satisfy demand,” he continued. Only 21% of residents can afford the median home price of $700k, which means there’s a lot of renters (creating a very rosy outlook for multifamily in OC and SoCal).

The Wolff Co regional VP Nate Carlson said his company has about $1.2B in multifamily projects of all types—market rate, affordable and senior—underway in both core and tertiary markets, and more are planned. “We just closed a new fund, so will be placing more money.”

Ocean West Capital Partners principal Troy Miller said his company recently purchased 2600 Michelson, the office tower where the event took place, and acquired two buildings in Santa Ana, with a total of 275k SF, which were converted to creative office.

Sandy asked if there are any drivers unique to OC that don’t exist in other SoCal markets, such as the Inland Empire.

“With new development, some cities make it more costly to develop, which is pushing back on the amount of new product being built,” Greg noted. “That’s happening in Huntington Beach, but that’s one of those things you don’t see in the Inland Empire, for example. The costs, fees and political pushback can be tough here.”  

Nate agreed, saying there are micro-pockets around OC where this is an issue, including Huntington Beach. OC fluctuates with all West Coast markets on socioeconomic issues and the global economy, he added, but what it comes down to is overall cost to develop a project, from land to labor to construction and time it takes on deals.

“In the Inland Empire, Utah and Nevada you can build things more quickly and cheaper than in OC, but those markets have more volatility, where OC is more stable,” Nate said. “So there are benefits to seeing projects through here.”

"From a more global perspective, we’re seeing amazing market fundamentals," Troy said, "and what’s different this time around is in LA you have real growth in tech and the convergence of the tech, entertainment, media, music and gaming sectors—causing all of Silicon Valley to want to be there,“ he said. Rents in Playa Vista are now $4/SF to $5/SF; $6/SF in Santa Monica; and $3/SF to $3.50/SF in El Segundo.

Snapped left to right are Troy Miller, Greg Campbell and Nate Carlson.

Even with the quality of product and lifestyle OC offers, office rents are hovering at $3/SF, “so we still have a long way to grow here,” Troy suggested. “But we’re still bullish on OC, because there is a growing and diversified job sector that added 150,000 jobs in 2015.” As a result, venture capital is coming into the market, vacancy is below 10% and there’s not a lot of new supply, he said. During the last five years, only 2.5M SF of office was added, whereas OC had added 1.5M SF of office every year for the past 20 years. Troy said foreign investors are beginning to look at OC.

Sandy asked if the market was trending up, down or flat.

On the office side there’s still room to run, Troy said. Lease rates are up 15% on average over a year ago, with Class-A more like 25% to 30%, but it's still 15% to 20% below the last peak, he said.

He said dealing with foreign investors, especially pension funds from overseas, is a very slow, cumbersome process. “They’ll pay 10% more than anyone else, but you’ll have to be willing to go for the ride, and then not certain they’ll be there at the end of the day or not,” Troy said, explaining it takes 90 to 120 days to close a deal.

Snapped here is our Maggie Whitney, Bisnow account manager, who kept the show rolling on schedule.

As long as job growth continues, pushing up incomes and population growth, we’ll see strength on transactional values and sales continue to inch up, said Nate. “We’re making bets on the developments we have in LA because of that, and there’s nothing on the horizon that would say otherwise. What we have under construction will be sold in a year or two or even this year, but values will be stagnant or drop below what was expected,” he said.

“Rent growth and vacancy has had a good run over the last few years,” Nate continued. "We expect it to continue to move up, but more slowly, mostly because of supply. So we’ll see vacancy hover for Class-A properties about 5% and rent growth will slow down, dipping below 4% to between 3% and 2%. But OC is stable and I think it will continue to be like that over the next two to three years,” he added. OC still looks cheap, even with office trades at $350/SF to $400/SF, because LA rehab deals start at $400/SF, and then require more for improvements and TIs, Troy said.

“When we came out of the recession, OC was the tortoise in the tortoise-and-hare scenario,” Greg said, noting places like Seattle had a lot of growth quickly, but the runway was short. “As a tortoise, we still have a lot of runway ahead of us," he said. He expects rents will increase 3% to 4% over the next four to six years.

The one pressure is affordability, Greg cautioned. “Rents have increased in the multifamily sector at a much faster pace than other goods and services. Rents can’t continue to increase by 3% or 4% every year, because wages aren’t increasing that much—many people are already paying 50% of their income for housing, he said. “So we’re pushing the envelope there—increases need to be moderate.”