The capital markets environment remains strong overall, but is less dynamic than the cyclical high reached in 2015. Cyclical-low unemployment rates and healthy property fundamentals have kept Orange County as a particularly attractive market for investors. Capital flows have shifted from crowded markets like Los Angeles into secondary and tertiary markets as investors explore alternative sectors and regions for higher yields. Overall, volume remains elevated and pricing is stable.
Tight pricing and limited availability of investable stock dampened total acquisitions activity in Los Angeles, but activity in Orange County picked up from last year. In H1 2017, investment reached $3.5 billion, a year-over-year increase of 12.1%. Individual asset sales, the best indicator for investment momentum, jumped by 27.8% year over year. Much of this investment was driven by large jumps in the hotel and retail sectors, while all other sectors remained at levels similar to those seen in H1 2016. Private buyers were the most active in the OC market, accounting for 76% of the total, and looking for value-add opportunities.
After gradual cap rate compression since 2010, local cap rates have largely stabilized in H1 2017, with prices holding relatively firm. Multifamily was the only sector in Orange County that recorded tightening cap rates, while the industrial sector remained unchanged and retail and hotel cap rates pushed upwards. The general outlook for cap rates and returns on cost in the second half of 2017 is for continued stable pricing. The consensus is that if rates do change in H2 2017, they are more likely to increase modestly.