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Office Fundamentals to Watch

Carrie Rossenfeld Office

Olive Hill Group, an owner/operator that focuses on office properties, has invested in more than $2.4 billion in commercial assets encompassing over 15 million square feet, including office assets in Los Angeles and Orange County, a representative of the firm tells SoCal Real Estate. We spoke with Tim Lee, VP of corporate development and legal affairs at the Los Angeles–based firm, about the trends he’s seeing in office financing, which amenities are gaining steam, and where he sees rent growth heading.

Tim Lee | Courtesy a representative of Olive Hill Group

SoCal Real Estate: What trends are you noticing in office financing as the sector continues to focus on redevelopment?
Lee:
The recent rollback of Dodd Frank will have a positive impact on financing for office properties, especially for redevelopment opportunities and properties that are not located in traditional urban cores. We anticipate that because of the loosening of regulations on these mid-size and regional banks, there will be more capital sources available to fund redevelopment of office properties in secondary markets across Southern California and in many areas throughout the U.S.

What amenities are tenants demanding most from office owners?
Tenants are demanding unique amenities, flexible workspaces, and a variety of indoor and outdoor community spaces that encourage collaboration. For example, at our creative-office campus in Culver City, California, we’ve incorporated an expansive outdoor community area equipped with hammocks, a life-size chess board, and a large-scale water feature surrounded by a variety of seating and gathering areas. The office asset also has a bike-sharing program, The Courtyard Cruisers, and offers Wi-Fi capabilities from anywhere on-site at the property.

The ability to access Wi-Fi outdoors or anywhere on-site has widely become a requirement among many tenants today. Employees want the ability to work from anywhere on site and do not want to be chained to a desk. They want to be able to lounge in a hammock on their laptop, or relax by the outdoor water fountain, all while completing their tasks.

Beyond these amenities, tenants are demanding smaller office properties overall. Because there is such a focus on outdoor spaces and amenities, which tend to be located on the ground floor, we are seeing a shift in the types of office assets in high demand from today’s tenants. They are demanding more mid-size office properties compared to traditional high-rise office buildings of the past. These smaller buildings tend to be more conducive to creative-office amenities and quickly connect tenants to outdoor amenities.

There has been some talk about office rent growth slowing, what is your take on the office market for the remainder of the year?
There is certainly some talk of office rent growth slowing. That said, this is very submarket specific. There may be regions, especially in urban cores, that might see some softening in rent growth in the future.

That said, in the areas in which we focus, which are the outlying submarkets of urban cores, these regions still have plenty of runway left in terms of rent growth. This is largely because there is a significant migration of both residents and tenants that are relocating to these regions in search of high-quality value alternatives. Both residents and tenants alike can find quality properties without the premium price tag compared to their urban core counterparts.

For example, Tesla recently relocated to Hawthorne, California, with many other large companies and tech firms following suit. This is resulting in significant redevelopment in these areas, which will increase the long-term value of properties in these regions, as well as rent growth.
Overall, we may see rents begin to plateau in certain urban markets while the outlying submarkets will continue to perform and experience steady rent growth over the next several years.

What types of tenants are office owners and investors seeing the most demand from, and will this continue over the remainder of the year?
An important thing to pay attention to as an office owner or investor in the commercial real estate space is “What are the jobs of tomorrow?” In many cases, these are the jobs that focus on technology, which is why we are seeing an influx in demand from tenants in the tech, advertising, and media fields.

As our society continues to incorporate more technological advances and shift towards more digital platforms, we will see the demand from tech firms and startups grow for many years to come.