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Demand Rushing to Amenity-Rich Office Campuses & Supply Constraint on Industrial Continues

By Brett Lessman

Office

The Orange County office market currently sits at a 10.2% vacancy mark with a quick increase in new, relet and sublet space. The average asking rent in Orange County has increased very slightly up to $2.60/SF gross, which is up a penny from the previous quarter. We have seen the “flight to quality” continue throughout the region with tech and financial services driving the charge and leaving the older high-rise and amenity-lacking product behind. This market has always been one of organic growth from within, with the main drivers being amenity-rich, campus-style products that have food options, gyms, shuttles, outdoor seating, and more on-site. Some of the most notable projects in the region include Spectrum Terrace, The Boardwalk, The MET, Flight, Von Karman Creative Campus and UCI Research Park, which have all been able to capture the market’s largest tenants as of late. In fact, Spectrum Terrace (Phase 1) is 100% pre-leased to Alteryx (188,000 SF), WeWork (116,000 SF) and Kajabi (50,000 SF) with all three of these leases signed this quarter.

We are still experiencing a slowing of the annual rent growth, and year-over-year growth currently sits at 0.8%, down from the 4.2% this time last year. However, as I eluded to in the last market report, the market is finally showing the quarter-over-quarter rent growth decline for the first time since 2012, but this is considering the entire market. The premium sub-markets such as Newport Center, UCI Research Park and the Irvine Spectrum are still experiencing a healthy occupancy rate and we don’t expect to see rents decline in these areas anytime soon, as they have won tenants by providing the previously mentioned on-site amenities.

Construction throughout Orange County has experienced a massive slowdown, as construction costs are still on the rise. The most notable of the ground-up construction is the H20 project in the Irvine Spectrum, which is 70,000 square feet built on spec and slated to be completed in December of this year. The rest of the construction has come in the form of re-positioning older office buildings. The Press is a great example of this, which is the old L.A. Times facility off the 405 freeway in Costa Mesa. They have been in discussions with WeWork and Google, and neither of these massive users have panned out, although the project is still undergoing a huge facelift and will not be completed until March of 2020.

Industrial

The Orange County industrial market remains incredibly tight at a 3.8% vacancy mark. Primarily an infill market to begin with, there is very little undeveloped industrial-zoned land. Couple this with the proximity to the Long Beach and L.A. ports and the constant redevelopment of older, obsolete industrial product into multi-family or high-end office and you have a serious lack of supply. Rent growth has continued across the region to $1.16 per square foot across all types of industrial (distribution, manufacturing, flex) and in a market consisting of 300 million square feet, there is only 1 million square feet under construction with Edwards Lifesciences (one of the largest employers in the region) accounting for roughly 20% of this. Even with Veritiv (424,000 SF in La Palma), Kuehne + Nagel (300,000 SF in Anaheim) and Toshiba (306,000 SF in Irvine) leaving their spaces behind in late 2018, it has given the owners of these buildings an opportunity to achieve a higher rent and in the case of Toshiba, reposition the building to capture an even higher number. Some of the larger tenants driving occupancy have been Albertson’s renewing their distribution center in Irvine for 945,000 square feet, Amazon leasing 414,000 square feet in Santa Ana for yet another D.C. and P&P Imports leasing 132,000 square feet in Irvine.

Sales of industrial product are still very strong with a total volume coming in at $6.1 billion over the past three years. While the bulk of these sales are investors looking to re-purpose the building or achieve a higher price point per square foot, owner-user sales have remained strong as well as occupiers are confident that the lack of supply and steady demand will still be there well down the road even with the average sale price increasing to $217 per square foot.

Brett Lessman is a senior vice president of Hughes Marino, an award-winning commercial real estate company specializing in tenant representation and building purchases with offices across the nation. Contact Brett at 1-844-662-6635 or brett@hughesmarino.com to learn more.



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