South OC Becomes the ‘Downtown’ for Office

South Orange County is quickly becoming the ‘Downtown’ of the Orange County office market—stealing the title from the Airport Area. South County has seen migration from other popular office markets, namely the Airport Area, and in the first quarter, the submarket led office absorption in Orange County, logging 864,000 square feet, according to the first quarter report from Newmark Knight Frank. Broadcom’s 660,000-square-foot lease at Five Point Gateway in Irvine accounted for the majority of the leasing activity, while class-B renovations helped fuel rent growth—making the market the most expensive in Orange County. To find out more about the South County market, we sat down with George Thompson, senior managing director at Newmark Knight Frank, for an exclusive interview.

GlobeSt.com: What is driving activity in the South Orange County market to the extent that it has become a leader in the office market?

George Thomson: The Irvine Co. has some fantastic new projects that hit the inventory, and so when you really look at the large blocks of quality space and how the Spectrum has evolved into a Downtown Orange County destination with the amenities and housing, the overall delivery of the environment there. It has access to a labor pool and large blocks of space where people can consolidate. Now, you have the bridges with Five Point Gateway, which is where Broadcom relocate. That has big trend in the in South County and the Spectrum in particular, not only this quarter, but it has culminated most recently with the delivery of these new projects. That is the ongoing dynamic, and we don’t see it stopping moving forward.

GlobeSt.com: Is the growth coming mostly from tenants migrating to the market from other parts of Orange County?

Thomson: Correct, but there has also been new tenants into Orange County as well as expansions of tenants from other parts of South County. The industry sectors that have gone there have been automotive advertising and automotive-related uses, some very cool space users that have evolved, including tech, like Blizzard, which continues to take up more space as they expand. The industry sectors that have driven the expansion are cube-dwelling organizations and industries that like collaborative spaces. It isn’t a lot of law firms, which tend to stay in the Airport Market proper or even in Central Orange County.

GlobeSt.com: How has the Airport market been impacted by the migration to South Orange County?

Thomson: Overall, the Airport market has lost some square footage, but we have delivered 565,000 square feet of new space with The Boardwalk. So, when you really look at raw numbers, I think it is more of a blip. We are seeing bigger activity in the Airport market proper that makes me think we are going to see that we are going to see more Airport market absorption hit the books in the third and fourth quarter of this year. I think you’ll see a reverse trend in the Airport market in the coming quarters, and I think that you’ll see an overall healthy office market in Orange County.

GlobeSt.com: How has the class-B market in South Orange County helped fuel growth in both leasing activity and rents?

Thomson: A lot of the class-B product has been upgraded and repositioned. There was a lot of running room between class-A rents and class-B rents, and as more projects have been redeveloped, it skews the class-B rent numbers to the positive. A lot of class-B properties have been repositioned, and that has surged rent growth in that market. We have had great class-B absorption, and that really helped increase class-B rents. Now, those rents are snuggling up to the class-A rents in the market.

GlobeSt.com: What is your outlook for the South County office market this year?

Thomson: I think that it is going to continue to be strong. There is a lot of demand in the market right now, and I think that we will see positive absorption in each of the submarkets within South County going forward.