IRVINE, CA—Despite 3.5 million square feet of office construction expected to be completed in Orange County between now and the end of 2018, tenant demand here will exceed supply, JLL's senior managing director Jeff Ingham tells GlobeSt.com. The firm's recently released Q3 office report for Orange County indicated that large office tenants are finding it difficult to locate suitable space for their operations as space options dwindle, particularly in the Airport Area submarket. We spoke exclusively with Ingham about the options for large office users in this market and how they're meeting their space needs.

GlobeSt.com: What are large tenants who are looking for space in Orange County doing since it's so hard to find?

Ingham: There are actually quite a few blocks of space that are larger, but not in areas where tenants want to be. In the Airport Area, there are not a lot of large blocks available—they may be in Santa Ana, but not in areas as desired as Irvine or Newport Beach. It comes down to available space in the areas they prefer. Right now, we are tracking about 15 tenants that are greater than 50,000 square feet out there, but are they in the exact location where they want to be? The way we look at it, we are looking at space that's not on the market today, but may be coming on the market in the future. We track and know when spaces are coming up. A lot of space doesn't hit the market because we're moving tenants out of the way in order to accommodate larger clients.

GlobeSt.com: So, are tenants opting for these less-desirable or less-popular submarkets of Orange County, going to different markets entirely or coming up with other creative solutions?

Ingham: It's yet to tell because they're renewing and taking expansions in their current locations. It's difficult to find it all under one roof, so they're bifurcating they're requirements and taking multiple spaces, expanding on what they have. Most typical, which has also happened in the past, is a huge flight to quality. During the down cycle, the workplace strategy of attracting and retaining top talent was the prime goal, and Millennials wanted a different type of office space than Boomers. There were a lot of scenarios where tenants didn't want to renew—they wanted new space with an open layout. A lot of clients weren't considering renewing in their space—they were looking for a different corporate image, and it was driving a lot of relocations. So, there was a flight to quality with the same rents and better-quality product.

Now that we're out of the down cycle, that's switching. Rents have gone up 20% to 30% in the last couple of years, and the real trend now is where cost-conscious clients are focused on where they can reduce their costs. There's the trend of companies looking to stay in place and pay more in rent without doing improvements. There's a flight to less-desirable locations and projects in order to save money.

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

Ingham: We see a big trend of construction—we're starting to see it with the Irvine Co., and we will see it with other developers—in this market, but it's not enough to meet the demand for office space. This year, we will see 500,000 square feet of buildings come online. In 2017, we will see more than 2 million square feet coming out of the ground, and in 2018 it will be closer to 1 million square feet. That sounds like a lot of space coming into the market, but we have averaged about 1.3 million square feet of positive absorption, and tenants are taking more space, so it's all net new growth. If we sustain or maintain that trend, the development coming online is not going to absolutely satisfy the demand unless there's another blip in the economy.

GlobeSt.com: What else should our readers know about large-space office tenants in Orange County?

Ingham: The one thing that's had a big impact and will continue to have a big impact on how companies occupy space is the mergers-and-acquisitions activity right now. Typically, shared services from M&As end up going to headquarters, and California is a more expensive place to do business than many other states, so they will go to a different market. Allergan is probably the biggest example of this, the Emulex M&A is selling its headquarters this week, and Ryland's M&A is bumping it to the Irvine corporate headquarters, so space is becoming available on the market, and we will have large blocks of it coming online. I don't expect that to slow growth, and M&A appetite is not going to slow down any time soon. It's not just happening in large companies, but in smaller technology companies, too. That will have an impact on overall space demands as well as what's coming back to the market.