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Rents Soar as Orange County Office Market Heats Up

By Tucker Hughes

The local space market is undeniably hot and many expect to see the most massive single-year rental rate appreciation numbers since 2006. Landlords will certainly have a story to tell their consumers to aid in the justification of increased rent pricing.

The fuel to this fire is a surprising amount of competition on existing space as companies look to secure the room they need for growth. It doesn’t help that large users such as Hyundai, which recently increased its footprint by 178,000 square feet in an expansion to 4000 MacArthur Blvd, are quickly gobbling up many of the most desirable full floor opportunities available.

The Irvine Company now only has two marketed full floor opportunities available for large users in their high rise portfolio surrounding the airport. Many landlords are predicting rent growth to be as high as 15% in the nicer buildings.

Speaking of nicer buildings, The Irvine Company’s iconic new 520 Newport Center Drive continues to make leasing headway despite a price tag that is well into the mid and high $5 per square foot range. New, high profile tenants include Acacia Research Group, Eagan Avenatti, and Janus Capital Group, to name a few.

It is rumored that many other deals are underway and that we could see some serious new names coming into Newport Center by the end of 2015. The Irvine Company is nearly out of entitlements for additional office space around Fashion Island, so one can only imagine what will happen to pricing as the supply pipeline completely evaporates. Hopefully The Irvine Company will find a way to secure additional square footage to build in Orange County’s most expensive office submarket.

New Opportunities for Tenants

There is another newly delivered office space in Newport Center, which carries a comparable price tag to 520 Newport Center Drive. Remember the Ritz restaurant? It’s been converted to a very unique opportunity for a 15,000 square foot tenant. It comes with surface parking, extremely desirable signage, and an exclusive large patio for events.

PIMCO’s old trading floor, which is immediately above the old Ritz space, also hit the open market with a splash. With numerous companies circling, the space went fast and at a price that may even make The Irvine Company blush.

An all-glass tower being developed by The Irvine Company in Irvine Spectrum is well under construction with a Spring 2016 delivery date. The building will be a welcome addition to the neighborhood, despite being the catalyst to change the addresses of dozens of businesses, as a new street name is forced upon the high-rise tenants currently located in 8001 and 8105 Irvine Center Drive.

The street will soon be called Spectrum Center Drive, and the new tower’s address will be 200 Spectrum Center Drive. The hope is that this new street name will create cachet value for tenants boasting the address, much like the high profile and recognizable Newport Center Drive, which encircles Fashion Island.

Early movers into the new glass tower will be rewarded with rental rates likely to be in the high $3s per square foot. Those who find themselves waiting until the building is more full won’t be so lucky, as rents are estimated to rise well into the $4 per square foot range after an expected strong round of pre-leasing.

400 Spectrum Center is a similarly designed tower that The Irvine Company has in the pipeline for additional Spectrum development in coming years. This momentum, in addition to Broadcom’s future relocation to the Great Park area, may end up shifting the business core farther south.

In case you missed the coverage on Broadcom, they’re investing $800 million for their new headquarters and plan to initially build about 1.1 million square feet of space. They’ve wisely planned for future growth and can nearly double the square footage of their existing buildout over time if space is needed. Broadcom’s current plan is to vacate the 920,000 square feet they occupy in University Research Park sometime in 2017 when their new campus is complete, though their lease with The Irvine Company doesn’t expire until 2018.

Creative Office Options Abound

Creative office redevelopment is in full swing as landlords look to take advantage of businesses that desire a more unique office environment to grow their team. One highly anticipated project is Bixby’s Avalon at 1501 Quail. Rents will be in the mid $3s per square foot and should go quickly, just like The Irvine Company’s Vine building in University Research Park did, which was a prototype for future creative office space.

Interestingly enough, just a few buildings down from Avalon, a new creative office development opportunity recently hit the market. Though it will require a mind bogglingly creative developer to figure out how to make use of the space, the old racquetball club at 1701 Quail has come available for an investor or owner user to purchase.

In other creative office news, Oculus, Irvine’s latest wonder story, which was recently sold to Facebook for over $2 billion, has put their entire space on the market for sublease. The executive team will retain only a few thousand square feet of space at 19900 MacArthur, which likely will only be used part time. This comes at no surprise given the generous relocation perks that were almost certainly offered up to the Orange County-based team.

Airport Development Up in the Air

Is new development around the airport imminent? To see new high rise construction, landlords will have to be confident they can secure rents in the $4 per square foot range with only moderate lease-up times. The high-water mark from the last cycle was the high-rise glass tower at 3161 Michelson, which occupies a prime position along Jamboree and the 405, and saw rents as high as $3.85 per square foot.

Many institutionally sized players have already tied up land and are waiting for the right window to pull their development trigger. One player who is surprisingly not visible at the table is The Irvine Company, though if they wanted to get in on the next new development bonanza they could almost certainly scrap their Airport Business Center buildings and rebuild at a substantially larger square footage. How likely is that to happen though? Let’s just say the payoff would need to be substantial given the extremely busy bank branches that would be displaced and the low turnover costs experienced in such a project.

Tucker Hughes is managing director at Hughes Marino, an award-winning commercial real estate firm with offices across the nation. As head of Hughes Marino’s Orange County and Los Angeles offices, Tucker specializes in tenant representation and building purchases throughout Southern California. Tucker makes frequent media appearances to speak on the future of commercial real estate, and is also a regular columnist for Entrepreneur.com. Contact Tucker at 1-844-662-6635 or tucker@hughesmarino.com.

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