IRVINE, CA—The Orange County office market saw more than 1.1 million square feet of positive net absorption in the second quarter, marking the highest single quarter of net absorption since 2005, according to JLL. Rental rates are expected to climb in the future as landlords like the Irvine Co. continue to push rates throughout the county, but the main factor that will cause office rents to rise is the increase in sales prices as investors clamor for trades, Jeff Ingham, senior managing director of JLL, tells GlobeSt.com.
“The sales market is really on fire, which will have a bigger impact on rental-rate increases than other market trends,” says Ingham. “Investors need to pay more than everybody else to get the deal, so they’ll need higher rents to justify the purchase to themselves. A number of buildings have sold recently—One Pacific Plaza in Huntington Beach, 2030 Main St. in the Irvine Concourse and a 130,000-square-foot vacant building in Santa Ana—and all those buyers are expecting more rent than the previous ownership in order to justify the prices. The trades happening now are not generally from distressed owners; that went away a while ago.”
Ingham says the PIMCO and Hyundai office-building completions during Q2 may be skewing the absorption numbers a little, “but I’d not call what they’re doing a part of the recovery. Five years ago, we weren’t seeing build-to-suits, but now we have a much more positive view. Of course, it’s very company specific—we’re not seeing mortgage companies building buildings yet—but we are still having a healthy, moderate recovery. We’re not seeing a big swing up and down as you’ll see in New York or in the Bay Area, where you have big spikes in rent and demand. Our recovery has been slow and steady, which has been good, and we’re at the tipping point where new buildings are being built.”
The recovery is also evident in that third-party developers are discussing construction, Ingham adds. “Hines bought a piece of land at Von Karman and Main and is talking about building a high-rise there. The same is true with LBA, which is talking about building an office building on an existing lot at Park Place. We’re seeing significant plans for new construction on both the hotel and the office front again.”
The fact that hotel development is returning to the market bodes well for the office sector, too, Ingham says, since these are truly hotels that service the office market. The recent delivery of the Courtyard by Marriott at Irvine Spectrum, a moderately priced business hotel, and a couple of other parcels that have hotels planned is a positive sign. “Hotels are being developed and planned, which is a major sign that we have turned the corner,” says Ingham. “A lot of the land is being converted to residential as well, having a positive impact on the commercial market and the overall employment market, which is leading the economy.”