IRVINE, CA—Since the economic rebound, there has been more than 900,000 square feet converted into creative-office space in the Airport submarket alone and almost as much set to be delivered in OC over the next 18 months, representing a direct shrinking of the class-B inventory, NKF's senior managing director George Thomson tells GlobeSt.com. According to a Q4 2017 report from the firm, class-B inventory comprised 72.4 % of 2017's net absorption gains in the Orange County office market. We spoke with Thomson about the availability of class-B office space, given how much in-demand it is and how much redevelopment into class-A space is happening in the market.
GlobeSt.com: Is class-B office space shrinking in Orange County with so much redevelopment into class-A space going on?
Thomson: Absolutely. Since the market rebound, there has been in excess of 900,000 square feet converted into creative space in the Airport submarket alone, with at least another 800,000 square feet currently set to be delivered over the next 18 months. These “creative-space” conversions consist of low-rise single building projects and larger, multi-building campuses that have been significantly repositioned by new, well-capitalized ownership to attract “creatives,” and altogether, the conversions represent over 9% of the class-B inventory. From a competitive economic standpoint, this is a direct shrinking of the class-B inventory.
GlobeSt.com: How are tenants seeking this space dealing with a possibly decreasing inventory?
Thomson: Class-B absorption represented over 72% of all absorption in Orange County during 2017, and not surprisingly, led all rent growth with a 9.5% gain as compared with 6.5% in the class-A sector. It's been a race to value—not just flight to value—for all class-B tenants, large and small, as the large blocks have been substantially absorbed over the last eight quarters and the creative conversions have pushed rates to class-A project equivalents.
GlobeSt.com: How are owners of class-B space competing with class-A space for tenants?
Thomson: As mentioned above, the well-done class-B creative space conversions have pushed rates to levels competitive with many class-A buildings in all OC submarkets. Incumbent class-B owners who have not repositioned their projects have begun to realize the benefits of the rental-rate disparity effectively shrinking the class-B base and fewer options for value-seeking tenants.
GlobeSt.com: Do you see class-B space continuing to dominate in absorption in this market over the next year?
Thomson: We saw a lot of class-A leases signed in Q3 and Q4 in the Spectrum and Airport submarkets. We will see a bit of a leveling of the absorption playing field on a percent-of-absorption basis between the class-A and class-B sectors when those tenants move in over the next two quarters. Class-A and class-B will both do well in 2018 since new-construction class-A projects and value-seeking tenants have fewer and fewer real class-B options.
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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.
