IRVINE, CA—Despite Orange County office deliveries expected to reach close to 600,000 square feet in 2016 and 2.2 million square feet in 2017, completions won't all come at once, helping absorption to catch up, JLL's senior managing director Jeff Ingham tells GlobeSt.com. The firm's Q4 office report revealed that despite the market recording a slightly negative net absorption during the quarter of -114,776 square feet, 2015 was the fifth consecutive year that experienced annual positive net absorption. Also, total office vacancy has reached 11.8%, the lowest since 2007. We spoke exclusively with Ingham about the relationship between office vacancy, the expected deliveries in the near future and absorption in the market.
GlobeSt.com: What is the relationship between Orange County having the lowest office vacancy rate since 2007 and the ramping up of deliveries between now and the end of next year? How will all these deliveries affect vacancy?
Ingham: Obviously, we will have an increase in vacancy. But right now, we're tracking quite a few tenants that are looking for more space. There are companies moving from existing space they own to new space that's not currently vacant. Emulex purchased last year and recently sold their headquarters, so they have two buildings vacant on their campus, which added to the vacancy and negative absorption. There's also lot of vacancy in existing buildings, not only from new buildings coming out of the ground. For example, the WaMu building, which is 400,000 square feet, has been vacant for seven years, and 2 MacArthur has also been vacant for several years. Vacancy is still over and above the 11% mark, which is not ideal for building new buildings, but the new deliveries that are coming on board are in a relatively controlled delivery system right now. The Irvine Co. has the financial wherewithal to move tenants from one building to another, so there's good activity there. The new delivery system will keep the market in check.
There's not enough market demand right now to fill up the current vacancy and the new buildings, and the stock market is making companies skittish as far as funding expansion and growth. But it's very balanced, and we're in a landlord's market right now. Based on deliveries, Irvine Co. is going full speed, Boardwalk is going full speed, Hines is going full speed with the redeployment of the WaMu campus, and the same with Steelwave and the Emulex campus. It's coming together quickly, but it seems as though we're in check. The good news is space is out there for companies who need to expand, and we're not growing too fast; we have good stable vacancy.
GlobeSt.com: How can we characterize the space being developed, and is there any worry of it not being occupied?
Ingham: There is some risk. For deliveries in 2018 and 2019, there's a lot of risk because of the unforeseeable future. If you start digging today, it will be into the end of 2017 before those tenants are lined up and moving in, so there's definitely some risk. There's also market volatility right now, especially for those developers who don't have a strong presence in the market.
GlobeSt.com: Do you subscribe to the idea that office footprints will continue to shrink for a variety of economic reasons, or conversely, that office footprints will grow as companies continue to recover and expand?
Ingham: Realistically, there are two things companies are trying to do: reduce the number of rooftops they have and get under one roof to consolidate, and grow while taking up less space. There is less demand for space, but it's not as bad as people think. As companies reduce private offices, they are putting in more shared space; they need more room for conference rooms, and they're building larger kitchens so people can have the privacy they had before. So yes, they're reducing their footprints, but not as much as people think.
In every cycle, there is a flight to quality. People want to rebuild out the space they have today, and if you have a cultural change and want to attract Millennials, one of the best ways to do that is to change your space. The new Avalon project, for example, is a creative-type campus attracting those companies who are changing their image to look cooler and hipper to attract Millennials. They will also spend money to do it because they can't stay in their old space and live through the construction. It's much more convenient to move than to live through construction. That trend will continue on and bode well for new construction coming out of the ground. Most amenity-based buildings will continue to attract the best tenants.
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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.
