Wetzel: It's true, sublease availability has increased since 2012, rising from 1.3% to 2.1% of the total OC market, but the drivers behind subleasing are largely threefold:

1. Positive: Scaling companies have outgrown their existing space and need to minimize remaining lease obligation.
2. Neutral: Corporate America remains hyper-focused on efficiencies, spurring site consolidations as companies look to stay lean.
3. Negative: Downsizing firms look to shed excess space because either previously forecasted growth that was not achieved and/or layoffs were implemented.

Call it good and bad cholesterol. When you look at the 80-bps increase in sublease space from 2012 to today, it's easy to point to high-growth companies and corporate consolidations as positive influencers because they are hinged on economic growth (e.g., venture-capital investments, hiring sprees, disruptive ideas, etc.) and economic efficiencies (e.g., more people in less space, more functional and dynamic workspaces, increased share of ideas, lower overhead costs, etc.).

But even downsizing companies offer a silver lining. Mortgage companies, who constitute nearly 20% of all sublease space in OC, are keenly aware of becoming over-inflated. Federal Reserve Chairwoman Janet Yellen approved short-term interest rates hikes to the tune of 75 bps over the past 12 months, and since the majority of mortgage companies' revenues stem from refinancing, they have recalibrated their business projections to protect themselves from future overexposure. Looking back at the last correction, companies like New Century and AmeriQuest didn't put their space on the sublease market or signal a crash was coming. Instead, they acquired space at a rapid rate before ultimately imploding. The very good news is we're not seeing that trend in today's direct or sublet office leasing markets.

GlobeSt.com: How is this market different from other office-sublease markets in the country?

Wetzel: Following the Great Recession, Orange County's economy diversified. In the run-up to 2008, the OC office market was heavily dependent on the mortgage industry, not just because of the space they themselves leased, but because of the multiplier effect mortgage had on supporting industries like law, accounting, banking, housing, etc. Since 2009, tech and tech-adjacent companies have been expanding beyond Silicon Valley into L.A.'s Silicon Beach and subsequently Orange County. Not only are the types of businesses in OC more diverse, the businesses themselves are more diverse, which adds to the health of the OC office-sublease market.

Office markets like Houston have failed to diversify. Houston, which is largely dependent on the energy sector—specifically oil, has struggled to deal with a glut of sublease space that hit the market when oil prices fell in Q3 2014. Because the Houston office market is almost singularly reliant on the energy sector, most companies in that vertical have downsized or are in the process of doing so, increasing supply and eliminating demand for sublease space.

Contrastingly, the sublease market in San Francisco is much healthier than Houston. When I asked my colleague Cody Bishop why, he said that demand for subleases is greater than direct options. Quickly scaling early to mid-stage VC-backed companies are extremely sensitive to capital expenditures, so “plug-and-play” sublease space often goes for a premium because companies can avoid spending money on TIs, FF&E, IT, moving costs, etc. Additionally, sublease space is moving quickly. When Twitter put 100,000 rentable square feet on the sublease market, it was almost immediately subleased by Thumbtack and NerdWallet.

Orange County isn't seeing the same subleasing or leasing velocity as the Bay Area, but on a scale of “Houston to San Francisco,” it's much closer to the latter.

GlobeSt.com: Where do you see this market heading?

Wetzel: Up—in a good way. B2C mortgage companies may be directly affected by interest hikes, but money is still relatively cheap for Corporate America. Because many corporations borrow money based on the 10-Year Treasury (which has only increased 43 bps in the past five years), access to capital remains readily available.

Available sublease space has increased a humble average of 16 bps year-over-year during the past five years. This increase mirrors the tepid economic growth we've experienced both locally and nationally, indicating that the OC office market will likely enjoy continued, slow-paced expansion for the foreseeable future.

For tenants looking to expand, they should know that while direct rates continue to climb, they're doing so at a slower pace compared to years past, and office lease concessions like free rent and TI allowances continue to increase as landlords compete to attract new tenants.

GlobeSt.com: What else should our readers know about this market?

Wetzel: Two things:

1. Orange County is California Cheap. Headquartering a company in OC versus Silicon Valley can offer a 53% discount. For a 20,000-rentable-square-foot office with 134 employees, this translates to $84,000,000 over a five-year term when factoring in rent, TIs and employee wages. Orange County's tech industry is expanding due to the highly talented and educated workforce (including the large number of STEM degree graduates), access to venture capital, and high quality of life, while being significantly more affordable than other California markets.
2. Orange County is diverse. Of the largest lease transactions completed in the past two years (i.e., leases greater than 50,000 rentable square feet), only eight of the 33 transactions were tenants in the mortgage or financial-services sector. Tech (e.g., Cylance, Cavium and Ultimate Software), auto (e.g., AutoGravity, Isuzu and Mazda), engineering (e.g., Jacobs, Michael Baker and OC 405 Partners), and consumer products (e.g., BEHR, Bosche, Collectors Universe, TriMark Raygal and Western Growers) positively impact net absorption in Orange County and underscore the market's past, present and future viability.

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IRVINE, CA—Sublease availability has increased in the Orange County office market since 2012, but the drivers behind subleasing are largely threefold, JLL VP Scott Wetzel tells GlobeSt.com.

Recent research from the firm shows that as of July, there are 32 blocks of sublease space of at least 20,000 square feet in Orange County. A majority of the space (677,382 square feet) is located in the Airport Area, with the greatest concentration found in Irvine with 529,040 square feet. South County has the second highest amount of available sublease space with 106,176 square feet. Also, the mortgage industry contributes 167,389 square feet of space to the market, followed by technology (128,064 square feet) and energy/utility (99,301 square feet) companies.

We spoke with Wetzel about the dynamics behind the OC office-sublease market and what lies ahead for it.

GlobeSt.com: Please explain the dynamics behind the office-sublease market in OC.

Wetzel: It's true, sublease availability has increased since 2012, rising from 1.3% to 2.1% of the total OC market, but the drivers behind subleasing are largely threefold:

1. Positive: Scaling companies have outgrown their existing space and need to minimize remaining lease obligation.
2. Neutral: Corporate America remains hyper-focused on efficiencies, spurring site consolidations as companies look to stay lean.
3. Negative: Downsizing firms look to shed excess space because either previously forecasted growth that was not achieved and/or layoffs were implemented.

Call it good and bad cholesterol. When you look at the 80-bps increase in sublease space from 2012 to today, it's easy to point to high-growth companies and corporate consolidations as positive influencers because they are hinged on economic growth (e.g., venture-capital investments, hiring sprees, disruptive ideas, etc.) and economic efficiencies (e.g., more people in less space, more functional and dynamic workspaces, increased share of ideas, lower overhead costs, etc.).

But even downsizing companies offer a silver lining. Mortgage companies, who constitute nearly 20% of all sublease space in OC, are keenly aware of becoming over-inflated. Federal Reserve Chairwoman Janet Yellen approved short-term interest rates hikes to the tune of 75 bps over the past 12 months, and since the majority of mortgage companies' revenues stem from refinancing, they have recalibrated their business projections to protect themselves from future overexposure. Looking back at the last correction, companies like New Century and AmeriQuest didn't put their space on the sublease market or signal a crash was coming. Instead, they acquired space at a rapid rate before ultimately imploding. The very good news is we're not seeing that trend in today's direct or sublet office leasing markets.

GlobeSt.com: How is this market different from other office-sublease markets in the country?

Wetzel: Following the Great Recession, Orange County's economy diversified. In the run-up to 2008, the OC office market was heavily dependent on the mortgage industry, not just because of the space they themselves leased, but because of the multiplier effect mortgage had on supporting industries like law, accounting, banking, housing, etc. Since 2009, tech and tech-adjacent companies have been expanding beyond Silicon Valley into L.A.'s Silicon Beach and subsequently Orange County. Not only are the types of businesses in OC more diverse, the businesses themselves are more diverse, which adds to the health of the OC office-sublease market.

Office markets like Houston have failed to diversify. Houston, which is largely dependent on the energy sector—specifically oil, has struggled to deal with a glut of sublease space that hit the market when oil prices fell in Q3 2014. Because the Houston office market is almost singularly reliant on the energy sector, most companies in that vertical have downsized or are in the process of doing so, increasing supply and eliminating demand for sublease space.

Contrastingly, the sublease market in San Francisco is much healthier than Houston. When I asked my colleague Cody Bishop why, he said that demand for subleases is greater than direct options. Quickly scaling early to mid-stage VC-backed companies are extremely sensitive to capital expenditures, so “plug-and-play” sublease space often goes for a premium because companies can avoid spending money on TIs, FF&E, IT, moving costs, etc. Additionally, sublease space is moving quickly. When Twitter put 100,000 rentable square feet on the sublease market, it was almost immediately subleased by Thumbtack and NerdWallet.

Orange County isn't seeing the same subleasing or leasing velocity as the Bay Area, but on a scale of “Houston to San Francisco,” it's much closer to the latter.

GlobeSt.com: Where do you see this market heading?

Wetzel: Up—in a good way. B2C mortgage companies may be directly affected by interest hikes, but money is still relatively cheap for Corporate America. Because many corporations borrow money based on the 10-Year Treasury (which has only increased 43 bps in the past five years), access to capital remains readily available.

Available sublease space has increased a humble average of 16 bps year-over-year during the past five years. This increase mirrors the tepid economic growth we've experienced both locally and nationally, indicating that the OC office market will likely enjoy continued, slow-paced expansion for the foreseeable future.

For tenants looking to expand, they should know that while direct rates continue to climb, they're doing so at a slower pace compared to years past, and office lease concessions like free rent and TI allowances continue to increase as landlords compete to attract new tenants.

GlobeSt.com: What else should our readers know about this market?

Wetzel: Two things:

1. Orange County is California Cheap. Headquartering a company in OC versus Silicon Valley can offer a 53% discount. For a 20,000-rentable-square-foot office with 134 employees, this translates to $84,000,000 over a five-year term when factoring in rent, TIs and employee wages. Orange County's tech industry is expanding due to the highly talented and educated workforce (including the large number of STEM degree graduates), access to venture capital, and high quality of life, while being significantly more affordable than other California markets.
2. Orange County is diverse. Of the largest lease transactions completed in the past two years (i.e., leases greater than 50,000 rentable square feet), only eight of the 33 transactions were tenants in the mortgage or financial-services sector. Tech (e.g., Cylance, Cavium and Ultimate Software), auto (e.g., AutoGravity, Isuzu and Mazda), engineering (e.g., Jacobs, Michael Baker and OC 405 Partners), and consumer products (e.g., BEHR, Bosche, Collectors Universe, TriMark Raygal and Western Growers) positively impact net absorption in Orange County and underscore the market's past, present and future viability.