Orange County CRE:  Optimism in 2016

Michael Gerard is Marketing Director at GRS Group(949) 272-0022mgerard@grs-global.com

Michael Gerard is Marketing Director at GRS Group
(949) 272-0022
mgerard@grs-global.com

Last week, I had the opportunity to represent GRS | Group at Bisnow’s Orange County State of the Market event, in Irvine. While national experts are divided about the commercial real estate forecast for 2016, the SoCal contingent seems to be pretty bullish. Coming out of the meeting, it felt as though our industry is on stable ground — at least regionally, and at least through this year. 

The event kicked off with a capital markets panel moderated by Jennifer Stroffe, shareholder and attorney at Friedman Stroffe & Gerard. The first thing Stroffe did was poll the audience for its sentiment. She queried: “How many in attendance think the CRE market will be stable or improve in 2016?” Remarkably, it appeared to be unanimous. Nearly every hand in the room was raised. She then asked if anyone thought we’d see a pull back in 2016. From my vantage point, not one hand went up. 

That was an interesting start, I thought to myself. I was anxious to hear what the panel had to say to the bullish crown. My anxiety proved unwarranted, however. For the most part, the panelists concurred!

Seth Grossman, managing director at Meridian Capital Group, kicked off the panel discussion. While sharing the room’s optimism for the year, his tone was more tepid for the longer term. “For the first time since 2011, there is reason to believe things are going to change,” he stated. Grossman pointed to a developing dichotomy in the industry. “Even though the market is still going in the right direction, the institutional lenders have pulled back on riskier deals and are imposing more structure,” he added.  

Clearly, this affects the smaller shops, I thought, as they won’t carry the leverage they’ve been afforded the past few years under looser scrutiny.  

“From a lender’s point of view,” Grossman furthered, “the frothiness is gone.”  

But then he reassured the audience.  

“While there are changes in the wind, the market is not falling off a cliff. There is no shortage of good deals and good lenders,” Grossman said with a comforting quality.  “Good sponsors, in good markets, will continue to get transactions done.”  Grossman was named one of Commercial Property Executive’s Stars to Watch in 2015.

Shawn Hansen, senior director at Greystar Real Estate Partners, agreed. 

“There is an abundance of capital,” he stated. “But it’s more selective.”  

Hansen also pointed out that the cost of capital has increased: “Spreads have widened on us significantly. And, with deals becoming tighter — and cap rates going down — we’re spending a lot more time with lenders justifying comps.”

iBorrow president Brian Good chimed in and likened the climate to the readjustment of 2001. “It’s getting harder to project risk-adjusted return two to three years out,” he remarked, also citing that regional factors come into play frequently. “With the current situation in the oil market, Houston is problematic. That said, Dallas and Austin are favorable.”

Greystar’s Hansen agreed about the regionality. With apartment properties in Houston, Denver and Oklahoma City, his firm is watching oil prices closely. But he also cited that lower oil prices could help other regions of the country, such as Southern California. Bottom line, each market carries its own risk exposure, and better players will gravitate towards markets that are more risk averse.

Bellweather Enterprise’s O.C. office SVP Jason Krupoff reported that new risk-retention regulations are forcing lenders to charge more for capital. No one is sure how it will shake out in the long run.  The good news is that regardless of the macro unknowns involving the global economy, oil, stock market and China, insurance companies, agency lenders, and banks have an abundance of capital they can spend on commercial real estate. 

With regard to property classes, multifamily remains the safest bet. Retail is challenging, especially in the big-box arena, said Brian Good. “You don’t see any tenants coming out of the woodwork,” he said. Good also suggested that small centers are more costly to run than larger ones, and they often stay vacant for longer.

Meridian’s Grossman then brought it back to the multifamily home base. “The cap rates are tighter,” he said. “But there’s more capital available for multifamily than other property types, and you’re seeing this in CMBS spreads. For example, a multifamily project and a solid retail center were virtually identical 18 months ago. Not anymore.”

From a lending standpoint, Grossman suggested the market would soften as we move into 2017: “Nevertheless, good deals will get done, unless we hit 2008 again, which I don’t see in the cards.”

With regard to the regional focus on Southern California and Orange County, a later panel reinforced the audience’s projection. Sandy Jacobson, a partner at Allen Matkins, moderated the “Orange County Real Estate Outlook” panel. Her firm, also, shares continued optimism among developers in its 2016 Winter/Spring Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey.

Among the most bullish panelists was Greg Campbell, senior managing director of acquisitions at TruAmerica Multifamily. He leads the firm’s acquisition and investment efforts in California, Arizona and Utah. Campbell also cited strong occupancy rates and projects a very upbeat outlook for Orange County and Southern California in general. “There’s lots of runway ahead of us,” he said. 

Troy Miller, principal at Ocean West Capital Partners, mirrored his tone. Ocean West owns 2600 Michelson — the class A office building in Irvine that hosted this event. He touted the region’s job growth and diversifying job sectors as creating significant continued demand for office space. Miller further added that, compared to L.A. and San Diego, Orange County has the highest median income, the highest home prices, but the lowest office rents. “We’re still on the rise,” he said. “There are too many positive factors in play, including good supply, reasonable rents and good job growth.”

What do you think about commercial real estate’s outlook over the next 12 to 24 months?

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