IRVINE, CA—Tenant demand for Orange County office space is booming, and developers are doing everything they can to meet demand as quickly as possible. According to JLL, with tenants seeking new amenities from office space, developers have been active in repositioning properties to keep up with demand. Recently completed projects include Gen2, Avalon, Radius and 2860 Michelle Dr., which combine for 242,500 square feet. Also, developers are drawn to reposition properties because costs are lower and length of construction time is shorter than ground-up development. The buildings currently being repositioned total 840,000 square feet.
We spoke exclusively with JLL's EVP Joe Bevan about the race to complete office properties in this market and how office-construction timelines are changing.
GlobeSt.com: Why is there a race to get office properties developed in Orange County?
Bevan: The short answer is that the Orange County office market fundamentals have finally recovered, for the first time in the post-Great Recession era, to justify speculative class-A and -B office development. But, how did we get here? Orange County has been on a terror with 19 straight quarters of positive absorption following 13 quarters of negative absorption (2007–2010). The Airport Area and Irvine Spectrum class-A and -B office markets have, on average since 2013, absorbed 350,000 square feet per quarter, resulting in direct-vacancy rates plummeting from 20.2% to 11.7% as of the end of Q3 of this year. During this same period, class-A and -B office rates have realized year-over-year increases of 10% to 20%, tenant demand has boomed as a result of an 8.4% increase in non-farm jobs (of which approximately 35,000 were office-using jobs), and still no new class-A office development, except for 520 Newport Center Dr. and 200 Spectrum Center Dr., which is anticipated to deliver Q1 of next year. Why now? Orange County will run out of class-A and -B office space in the Airport Area and Irvine Spectrum in less than 6 years without new construction if: 1. the EDD has accurately projected Orange County's office-using job growth of 11,000 per annum through 2022; 2. each of these jobs absorbs 200 square feet of current direct vacancy; and 3. the jobs are all added in class-A and/or -B Airport Area or Irvine Spectrum submarkets (this could be a stretch, but follow the roof tops, as they say).
GlobeSt.com: What are developers doing to speed the process along?
Bevan: The developers in this cycle are, in large part, the beneficiaries of the entitlement work which was completed pre-Great Recession. That's the good news. The bad news, unfortunately, for the non-Irvine Co. developers is that they couldn't pull the trigger before the market fundamentals warranted speculative development, which has coincided with global competition for long lead-time items such as steel, glass curtain walls and concrete. First-mover advantage will be largely determined by these items being ordered and delivered.
GlobeSt.com: Are timelines changing for office construction?
Bevan: Time will tell. Anecdotally, there is general skepticism in the market that the speculative development will deliver according to 18-month construction timelines. Everything takes longer than expected (as we all know), and development in Orange County will not be immune to this. The most likely outcome, and maybe not such an unfavorable one, is that the development will have a staggered and more protracted market delivery over the next 24 to 48 months.
GlobeSt.com: What can we expect with regard to office deliveries as the cycle reaches maturation?
Bevan: Because of the late cycle, speculative development and scarcity of class-A and -B office space in the Airport Area and Irvine Spectrum submarkets, developers/owners with existing blocks of contiguous space will be able to exploit a gap in the market to meet increasing tenant demand before new development is delivered. 200 Spectrum Center will certainly be the headliner in the Irvine Spectrum with new product, and Hines' acquisition and ongoing repositioning of Intersect (formerly known as Quintana and the Washington Mutual campus before that) will lead the market in the Airport Area, which will provide tenants a like-new campus office product. More importantly, these two projects are the only large contiguous block alternatives in Irvine until the new development comes on line. Two tenant trends to look for as developers race to build new product: first, tenants will continue to densify as a result of global trends in office space utilization and increasing occupancy costs, and second, tenants will have a first-mover advantage to existing product and/or pre-leasing commitments to new product.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
