Still Plenty of Room for Growth in SoCal Office Pricing

Carrie Rossenfeld Office

Yardi Matrix’s CommercialCafé recently released its Q3 SoCal office report, which revealed that sales prices rose 4.7 percent in Orange County year-over-year, closing Q3 at $311 per square foot, according to a representative of the firm. The rep also said EQ Office’s $200 million sale of its Newport Beach and Irvine portfolio was Orange County’s largest deal in Q3.

In addition, the report showed that 366,000 square feet of office were delivered in Q3 in Orange County, all in the final two buildings of the Five Point Gateway project in Irvine. And, while approximately 1.4 million square feet of office are expected to boost inventory in Los Angeles by the end of 2018, only 120,000 square feet are expected in Orange County.

Doug Ressler | Courtesy a representative of Yardi Matrix

SoCal Real Estate spoke with Doug Ressler, a senior research officer with Yardi Matrix, about his predictions on SoCal office pricing in 2019 ant the factors influencing pricing in these markets.

SoCal Real Estate: What are your predictions on office pricing in the Orange County, San Diego, and Inland Empire markets for Q1 2019?

Ressler: We’re seeing suburban-primary and secondary-property classes beginning to gain momentum in all four office markets. This is especially true in Orange County and Inland Empire.
Central Business District (CBD) sales have been static or nonexistent over the last eight quarters in all SoCal markets.

What factors are influencing pricing in these markets?

Employment trends in the Southern California market are average 1.0 percent to 1.2 percent, gains which is significantly below the national average. Low volume of move-outs tied to earlier consolidation shifted vacancy slightly up in CBD markets. We believe the negative absorption is temporary and will be counterbalanced in coming quarters as leasing activity will adjust to market conditions.

Are these markets in danger of getting too hot price-wise?

There is still plenty of room for growth, especially in the CBD perimeter borders adjacent to vibrant secondary urban diversity.

What else should our readers know about pricing in these office markets?

GDP growth is running above the inflationary trend and is scheduled to fall back to its longer-run rate by 2021, even as inflation is not expected to accelerate beyond the Fed’s target. With no acceleration in inflation, what impact will five additional rate hikes have? Fed policy and inflation may have a dramatic effect in the next 18 months.

In the Inland Empire, we see the eastern half of the market, where there’s consolidation and opportunity for expansion, present the greatest economic opportunity due to availability of land. Higher transportation costs to and from the ports will dampen this movement. However, import volumes are at record highs, and costs have soared in the western basin.

In San Diego, the UTC and Eastgate submarkets have seen high demand, with a combined positive absorption of over 500,000 square feet. UTC has seen a renaissance of amenities with the upgraded Westfield UTC Mall, new apartments, and the trolley-line extension, which is scheduled to begin operating in 2021.