Why Office Rents Are Heading Down

Office rents in Orange County may be heading down. According to research from JLL, the Orange County market has an increasing supply of large blocks of office space. Currently, the market has 60 blocks of at least 50,000 square feet of space, the majority of which is in the airport area of Orange County. The redevelopment of class-B office space is adding to the supply as well. While that is good news for tenants—who now have their choice of space—it could mean that landlords will be making allowances on rents. To find out more about this trend in the Orange County office market, we sat down with Jeff Ingham, senior managing director at JLL.

GlobeSt.com: Why is there such a surplus of large blocks of office space in Orange County?

Jeff Ingham: There has been a lot of market movement, and there has been some downsizing, not in terms of employment but in terms of how people are using space from an efficiency perspective. We have a lot of clients maintain headcount, but they are moving from an office environment to a cube environment. That is one piece of it. We also have had a lot of movement from the airport area to Irvine Spectrum market, and we are seeing movement from the airport area or airport adjacent companies to Santa Ana. That is putting a lot of space on the market.

GlobeSt.com: Why is there such a migration to the Irvine Spectrum market? I imagine it isn’t pricing.

Ingham: Pricing is actually more expensive in almost all cases. There are two factors. It has to do with the availability of space and the second factor is the growth within Orange County is moving further south with all of the new housing developments. If you look at people that are 25 to 35 and starting a family, they are going to South Orange County with good schools and more adaptable housing. In my opinion, the county is moving further south. The airport has the largest supply of space, and if there was a downtown, the airport would be the downtown of Orange County. It is still the second location. Companies are tending to shift further south because they are trying to attractive new talent.

GlobeSt.com: What does this surplus in office supply mean for office tenants?

Ingham: It is great. Now, companies have the ability to look at space they can actually move into, and there are more options in the market. Two years ago, the market didn’t have options, and you couldn’t find two contiguous floors that you could put together. If you are looking for 100,000 square feet in the airport area, you have more than half-a-dozen options. Right now, it is a good time to be a tenant. The other thing that is unique is that there are hundreds of millions of dollars that have been invested into older buildings. The older buildings, many of which were built in the 80s, are now getting huge cash infusions, and they meet the current standards that companies are looking for. We are going through an office renaissance, and that is creating good options for tenants in the market as well. In the last five years, tenants have been more selective in what types of space they are looking for because they are trying to attract and retain a certain type of talent.

GlobeSt.com: How is that going to impact rents?

Ingham: My personal opinion is that rates are going to drop. Companies have invested a lot of capital into the buildings, so owners are maintaining a certain rate. As more options are out there, the market is going to be more competitive and there will be downward pressure on rents. That is going to start right now. That trend will continue as more supply comes to the market—and there has been more than 1 million square feet of negative net absorption over the last four to five quarters, with this quarter being 75,000 square feet of it.