These OC Office Buildings Aren't Selling

Dienstag: “More than half of the 200 Spectrum Center tower has been leased, and once the tenants occupy the space, the vacancy rate will drop.”

IRVINE, CA—Most of the skyline office buildings in Orange County are owned by the Irvine Co. and CJ Segerstrom & Sons , both long-term-hold owners, JLL senior research analyst Jared Dienstag tells GlobeSt.com. This fact explains the lack of sales volume for skyline office buildings in the market. According to a recent report from the firm, there have been modest declines in investment volumes for skyline buildings in this market for 2016, and although Orange County is recording positive economic indicators, concerns on the global economy can impact the appetite of investors. Dienstag tells GlobeSt.com exclusively that most of the skyline properties in this market are located in the Newport Center and Irvine Spectrum micro-markets, which are the two highest-priced micro-markets in Orange County. “Average monthly class-A asking rent in Orange County is $3.00 per square foot, full-service gross, while the Newport Center average is $4.67 per square foot and Irvine Spectrum has an average of $4.03 per square foot.” On average, Dienstag says skyline buildings command rents 25% to 35% higher than the overall Orange County class-A market. In addition, although the skyline direct-vacancy rate of 13.5% is slightly higher than the Orange County class-A rate of 12.1%, this is primarily due to the recent delivery of Irvine Co.’s 425,000-square-foot 200 Spectrum Center tower. “More than half of the tower has been leased, and once the tenants occupy the space, the vacancy rate will drop.” Also, only one skyline property is currently under construction which is keeping total inventory and available space in check, says Dienstag. “The Irvine Co. is developing a 426,000-square-foot tower at 400 Spectrum Center Dr. , which is expected to be completed in the second half of 2017.” The report goes on to say that venture-capital funding in Orange County’s high-tech industry is showing signs of slowing down, which can hinder the ability of technology firms from expanding their real estate footprints. Due to these concerns, investors will be cautious with their investments. In addition, foreign investors now own more than 14% of the country’s skyline buildings, with Canadians and Germans claiming more than 60% of that total. In 2015, those cross-border buyers remained focused on the biggest and the best—with more than 60% of those dollars targeting trophy assets. And they haven’t strayed far—planting nearly 94% of their investment dollars into primary markets such as New York ($4.6 billion), Boston ($1.4 billion) and Seattle-Bellevue ($700 million). This has caused a change in investment strategies across North America. Challenged by peak pricing and scarce investment opportunities, both foreign and domestic buyers will continue to be drawn to hot secondary markets where rent growth is still achievable and tenant demand will persist in the months to come. Orange County, Atlanta, Portland, Miami and even Cincinnati, Phoenix and Pittsburgh have all benefitted from that interest. Despite the rise in popularity of older creative buildings and fringe markets, assets within the skyline are still the gold standard, but owners need to stay mindful they don’t tarnish with complacency, JLL says. For example, in sunny Orange County, that means landlords must invest in common areas, building systems and office space to improve their chances of attracting and retaining tenants. “With several new speculative office projects expected to break ground this year and several creative campus conversions underway, tenants who desire newer modern buildings or creative space will have more choices, causing a softening of rents,” says Jeff Ingham, JLL senior managing director in Irvine, CA. “Location, amenities and the quality of investment the owners are making is creating a truly … have and have not situation…  with regard to which projects our clients are pursuing.” With developers leveraging development and redevelopment opportunities across all property types, how can you capitalize on this activity? Join us  at RealShare Orange County on August 16^th for impactful information from the leaders in Orange County CRE. Learn more .