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New Development, Trend Toward Quality as Tenants Compete for Talent

As the strong economy continues to buoy job growth, several new developments are jockeying to meet demand. Image via The Boardwalk.

By Tucker Hughes

The vacancy rate for office space in Orange County has decreased to 10.1% with 412,158 square feet of positive absorption in the second quarter of 2015 alone. This is indicative of a market that is in growth mode, but the statistics don’t tell the entire story.

Consider that building vacancy rates when broken down between Class A, B, and C product types are 12.7%, 10.1% and 5.3% respectively. Are the lowest-end buildings actually the most in demand right now, or is a correlation between secondary factors unevenly skewing the analysis? Obviously it’s the latter — a perfect example of how statistics spouted off at a macro level can obscure reality when it comes to real estate. However, once you move out of the numbers and into the real world you will see more competition than ever before, even in the face of rapidly escalating rental rates.

As the local economy continues to generate new jobs and positive, forward-looking indicators, some tenants are taking decisive action to improve their image and better position themselves to recruit the right talent. Vans entered into a contract in June to buy a 180,000 square foot building in Costa Mesa, which it will reposition as creative office space to house its team. Career Builder just moved from Irvine Company’s Executive Park campus in Irvine to a high-rise office tower in the expensive Newport Center market surrounding Fashion Island. This is representative of a sweeping trend of companies seeking to differentiate themselves in the competition for talent by making significant investments in their office space.

Speaking of Newport Center, 520 Newport Center Drive has continued to make leasing headway in line with conservative projections, but activity is likely not as robust as what the owner had expected. That may change quickly though, as the building is already 31% leased with numerous multi-floor users in the late stages of negotiations.

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Architect’s rendering of The Boardwalk, courtesy of Gensler.

Trammell Crow Company purchased seven acres of land from a real estate fund out of Maryland back in April, and has made quick progress on the early stages of work required to transform this prime location in Orange County’s Airport Area into a great new office development. Being referred to as “The Boardwalk,” the project is expected to begin construction by the middle of 2017 and will comprise two nine-story buildings for a total of just over a half million square feet. While the proposed design is extremely cool and features a system of indoor and outdoor bridges connecting the two towers, anyone well versed in construction will recognize the precipitous magnitude of its cost. The new development is very exciting, however the best-case scenario from a scheduling standpoint would have these buildings coming to market for tenants in five to seven years. Given the cost, the required rental rates to justify its development, and the uncertain long-term future of the economy, this seems like a big gamble.

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Hines’ latest project aims to give The Boardwalk a run for its money. Image via 17850 Von Karman.

Trammell Crow believes The Boardwalk will be the first major development in the Airport Area to deliver new product. They are in stiff competition with Hines’ 17850 Von Karman project, however, as well as a myriad of smaller developments from local and institutional players that aim to bring more creative office space to the market. Hines has been making acquisition upon acquisition as of late, picking up 4000 MacArthur from Emmes earlier this year, along with their impending purchase of the Quintana project on the corner of Main and Von Karman.

New development is exciting. All it takes is a quick drive to Irvine Spectrum to see 200 Spectrum Center, which just topped out its glass panels this last week. More is to come in the future and it is expected that additional developers will start announcing plans in the coming months. In the meantime, remember that statistics and analysis presented by landlords is rarely going to sound favorable to tenants, but that there are still deals to be had in the market despite its increased velocity.

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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