By Tucker Hughes 

Rents across both office and industrial real estate in Orange County continued to rise through the end of the first quarter with vacancy rates remaining essentially flat. More specifically, we experienced average office rental rates moving from $2.33 to $2.40 per square foot countywide and industrial/flex rental rates moving from $0.88 per square foot to $0.90 per square foot. If this trend continues that would mean 12% and 10% rental rate growth respectively across each product type. In the foregoing sentences the office rents are quoted on a full-service basis and the industrial rents are quoted on a triple net basis.

So while not much is happening to vacancy, rents are still on the rise, and landlords continue to pursue opportunity while the market allows. For example, Irvine Company was the first in the market to begin building a major speculative development with 200 Spectrum, which delivered last summer, and still continues to deploy more resources by repositioning existing buildings and adding more product to their asset base through additional development projects.

Tenants at Irvine Company’s Airport Business Center project, immediately across from the entrance to John Wayne Airport, have all been notified that they will need to vacate the project as part of plans to re-develop the center into a modernized creative office environment. These buildings are going to deliver to new tenants in 2018. For those wondering what’s happening to Union Bank and Bank of America, both of which have extremely busy branch operations run out of this project, they plan to stay open through construction and into the future.

So what fuels the desire to kick out paying tenants and spend a significant amount of money improving the buildings while losing rent over the period of construction? Enormous upside on rental rates. Very close by on Von Karman, a Hines/PIMCO owned office campus called Intersect is securing rents in the high $3.00s per square foot range with The Boardwalk project, the half million square foot new office development on Dupont and Jamboree, having pushed rents even higher.

An interesting by-product of all of this development and re-positioning of assets is that most of the available space is for large users. Until recently you would have been challenged getting an audience at Boardwalk if you were less than 30,000 square feet, and while Intersect does have some smaller opportunities and existing tenants, the vast majority of tenants that have signed in the project have been leasing upwards of 20,000 square feet at a time. There once was a period prior to the delivery of all of these new projects where institutional landlords employed a strategy based on buying buildings with large chunks of contiguous vacancy. The idea here was that large groups were going to have nowhere to go. Now it seems the opposite is true, with the space market being even tighter for medium sized tenants.

With all the new deliveries on the office side, you can’t help but question how some of these owners will fare. Last summer the first new tenants moved into 200 Spectrum, the brand new 21-story glass tower across from Spectrum Center Mall. The building is now almost entirely full, with the only major vacancy being the penthouse which carries an asking rate of $5.25 per square foot. 400 Spectrum, an identical building a few blocks away, delivers this summer and while activity is high, they are behind on lease-up relative to what they achieved at 200 Spectrum. That said, 400 Spectrum is still very likely to be a success given the historically high demand for the area, the limited available space, and the lack of competing buildings nearby. Since Irvine Company owns almost all of the land in this area, they will bring buildings online at the opportune moment versus flooding the market with unnecessary inventory, which occasionally happens as competing landlords race to deliver product.