Orange County Highlights: Michael Dorsey of CBC Advisors Writes in WREB

OC Spec Office Development Signals Post Recession Recovery

ORANGE COUNTY, CA (August 8, 2017)—Orange County’s innovative office economy continues to be supported by healthy underlying demand drivers. Tech, financial and business services companies continue to provide a strong employment base that was not readily present during the last cycle. Major colleges and universities such as Chapman and UC Irvine provide a steady pool of job-seeking professionals. The climate, lifestyle and general quality of life also continue to attract top employment talent from across the country.

Office vacancy is trending downward with rental rates increasing beyond pre-recession levels. As the health of the office market solidifies, notable developers like the Irvine Company, Trammell Crow Co. and Lincoln Property have recently commenced or completed construction on formidable office projects. These new office projects are noteworthy in that they were started on a speculative basis. This is a new trend in the market that would have been unheard of less than three years ago. This is a strong indication of the increased confidence by lenders, equity sources and developers in the Orange County office market’s recovery.

Irvine Company has become the dominant source of speculative development due to considerable new development. This company was ahead of the spec curve when it built the first sizeable inventory of the cycle with 520 Newport Center and 200 Spectrum Center, both of which were 95 percent leased within one year of completion. Factor in the 467,000-square-foot, 21-story 400 Spectrum Center building, a pair of recently completed mid-rise buildings on Sand Canyon Boulevard and the Quad project at Discovery Business Center, and this adds more than a million square feet to the area. Rounding out the current burst of speculative office development is Trammell Crow’s 537,000-square-foot Boardwalk project on Jamboree in Newport Beach and Lincoln Property’s 870,000-square-foot creative office project known as the Flight in Tustin’s Legacy development. This is a joint venture between Lincoln and Alcion Ventures.

The renovation and redevelopment of office space continues to be dominated by creative office space. This is second-generation space that has been converted into open-air working areas with few, if any, traditional partitioned walls or private offices. Blend this with a nice balance of collaborative shared work spaces and other tenant amenities like landscaped, open-air sitting patios, lounge areas with Wi-Fi, and food services and the new concept is complete. However, these extra costs associated with the conversion can cause rents to exceed comparable, traditional office rents by amounts as much as 20 percent to 30 percent. This has raised the “caution” flag for many as a lot of creative space has, or will soon enter, the market, causing industry experts to keep an eye on statistical absorption trends.

About 1.6 million square feet of new office space is scheduled to hit the market in 2017, the most the county has seen since 2007. Net absorption is estimated to trail, but not by a significant margin. Although vacancy has been declining, experts expect a slight uptick by year’s end due to the increased inventories, but this should not be enough to erode existing strong rent growth.

Vacancy in the Class A office sector currently stands at 11.9 percent, while Class B and C product settles in at 7.3 percent. Average, full-service annual rental rates for Class A space currently range from $33 per square foot, per month to $60 while Class B and C rents range from $27 to $33. Asking rates in the new creative product range from $39 to $48.

Tenant improvement packages offered by landlords vary depending on rental concessions like free rent and discounts off published asking rental rates. However, as an average rule, tenants can expect TI allowances between $12 per square foot to $15 for second-generation space, while amounts of $60 to $75 would apply to new shell space.

— By Michael Dorsey, Managing Principal, Coldwell Banker Commercial Advisors. This article first appeared in the July 2017 issue of Western Real Estate Business magazine.