Challenges and Opportunities in OC’s CRE Market

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ORANGE COUNTY, CA—Strong competition among investors is one of the biggest challenges the Orange County commercial real estate market faces, survey respondents tell We polled readers who work in the Orange County CRE market to find out their opinions on challenges, economic drivers, untapped opportunities, LEED certification and other issues that are top of mind for local CRE professionals. Here, the results, which will also be discussed during the panel session “Survey Says: And Local Leaders Fire Back!” at RealShare Orange County next week (August 18).

When asked about the biggest challenges facing the market, 53% of respondents said “Strong competition from investors is driving up prices—there is a lot of capital chasing too few deals.” Ed Hanley, president of Corona del Mar, CA-based Hanley Investment Group Real Estate Advisors, who will be speaking on the local leaders panel, tells exclusively, “As yields for multi-tenant retail in prime Orange County markets continue to compress, an increasing number of investors are seeking investment opportunities in secondary or tertiary markets across the country to meet their investment requirements. Those investors willing to purchase well-located single-tenant retail properties or anchored shopping centers in small to mid-size markets are able to take advantage of above market returns at a significantly lower price per square foot.”

Meanwhile, 23% of respondents to the question about challenges cited, “There is a lack of developable land, and land is being converted to residential” as the greatest challenge to this market. Eleven percent of respondents said the greatest challenge was, “It is expensive to build on the coast,” and another 11% said, “Large blocks of office and industrial space are difficult, if not impossible, to find.” Surprisingly, 0% or respondents found that “High taxes (throughout California) are giving users a reason to move elsewhere.”

Lifestyle is seen as the most important economic driver in the market, according to respondents. A total of 59% said, “Users are drawn to Orange County because it helps them attract and retain talent who love the climate and proximity to the beach.” A moderate 17% of respondents said foreign capital was one of the most important economic drivers to the area, while 12% cited proximity to the ports driving industrial users was significant. Tourism, including Disneyland, Knotts Berry Farm, L.A. to the north and San Diego to the south making Orange County a popular spot to visit was seen as a major driver by 12% of respondents, while 0% felt that healthcare was a major driver, even though healthcare users are among the top office users in the county.

When asked what are the biggest opportunities in the market, 59% responded, “Infill development—developers see growth opportunities in these markets for almost every product type.” Also, multifamily development was seen as a great opportunity, with 29% of respondents agreeing with the statement, “There will never be enough apartments to satisfy the demand in this market.” Hotel investment, driven by tourism and business tourism, was considered a major opportunity by 12% of respondents, but 0% of respondents felt that alternative healthcare (with health and wellness as big business in the county, especially in the more-affluent coastal areas) and synergistic shopping centers (including gyms, juice bars, health-oriented eateries, activewear shops and hair/nail salons all in one center) were among the biggest opportunities in the market.

Noting that Orange County just saw its first LEED-Platinum certification in one of the South Coast Plaza office buildings, we asked, “Why has this taken so long, and what is preventing more buildings from getting LEED-Platinum certification in this market?” Forty-one percent of respondents said that lack of proof that LEED certification offers enough benefits to owners is the main reason preventing owners from going after this designation, 35% cited the cost to build or retrofit buildings to LEED specs, 24% cited the cost to go through the LEED-certification process, and 0% felt that the lack of information available about LEED certification was the reason.

With affordable housing being sorely needed in this market, we asked, “What incentives are needed to encourage developers to add affordable to their mix, or to add a component of affordable to market-rate projects being built?” Relevant tax breaks were the incentive cited as lacking by 47% of respondents, enough land to provide adequate market-rate and affordable units was the response of 24% of respondents, proof of appropriate demand for this product type was cited by 18% of respondents, while 0% responded that capital allocated to affordable development was lacking.

With a nod to the industrial sector, we asked, “How can Orange County keep industrial users in the county when rents/purchase prices are high, land is scarce and the Inland Empire is so convenient?” Forty-seven percent of respondents said what’s needed are tax incentives for industrial developers, 41% said less conversion of industrial space to other uses, 6% said price breaks on industrial land and 0% said more space should be allocated to pure industrial development or use; 6% had no answer.

Lastly, we asked, “What is the best way for retail owners to increase sales and provide entertainment value for consumers in their centers?” Forty-seven percent of respondents said, “Look for and create synergies between retail tenants and capitalize on those synergies,” 41% said, “Lease to fresh, new restaurant retailers and entertainment concepts that Millennials like,” 12% said, “Use social media to draw in customers and keep them in the center,” and 0% said, “Lease to as many strong grocery stores, pharmacies and service providers as possible.”

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