IRVINE, CA—The Orange County office market continues to tighten as significant amounts of space is absorbed, as GlobeSt.com reported last week in an interview with Jeff Ingham, senior managing director with JLL. With vacancy rates decreasing and rental rates increasing, is the region becoming a landlord’s market once again? Here’s more from our interview with Ingham.
GlobeSt.com: Is Orange County becoming a landlord’s market once again?
Ingham: It’s balanced. It’s not absolutely a landlord’s market. There are a lot of things that go into that. When I think of a landlord’s market, it’s truly a situation where you have no options. We had that in 2005: if you were a tenant looking for a two-floor space in the Airport area, there were no buildings with two contiguous floors available. That was truly a landlord’s market, where tenants were trying to squeeze into certain spaces and there were multiple offers on space. We’re really not seeing that yet. Large blocks of space are going away, and the market is slightly tighter, but there are still options in the market, especially 50,000 square feet or below. A lot of those places have been vacant for years. The landlords in those instances are pursuing tenants aggressively, especially if they’re credit tenants. We’re also seeing a lot more companies giving back space as they renew their leases. A lot of companies are sitting on shadow or vacant space.
We are also seeing more construction on tenant improvements. If a space was built-out 10 years ago, it doesn’t meet the Millennial generation’s requirements, so tenants are building-out in the major markets. A major trend is less square footage per employee and getting rid of shadow space. So companies are technically reducing their footprint, and we will probably see a fair amount of that space in the next couple of years. Companies are healthy and growing, but they’re doing more with less. There’s also this whole Valeant/Allergan situation that’s going to have a big impact on the market as well.
GlobeSt.com: Rick Sharga of Auction.com recently told us that Orange County is that is seems to be doing much better than the rest of the country in terms of the office-segment recovery. Would you agree?
Ingham: It depends on how you look at it. San Francisco is already recovered, and so have other markets. But that’s probably a fair comment if you consider the recovery. Those markets are much more on fire—they’re true landlord’s markets—compared to here, where we’re still in recovery.
GlobeSt.com: Can other office landlords really afford to push rents the way the Irvine Co. has? Are there limits to this?
Ingham: Yes, there are limits because it’s still a competitive market. Tenants are still going to work with their budget and will at some point need to take space at a certain dollar amount. If you compare Orange County rent to other markets like Silicon Valley, we’re half the cost. We’re a similarly oriented market, so there is room for growth, but as rents increase, tenants will take less square footage and mitigate increasing cost. In the last five years, there’s been a major flight to quality, and the inverse will be true as rents increase and companies look at their real estate budgets.
GlobeSt.com: Are firms overlooking California’s tax issues and other expenses to remain in the state rather than move to a less-expensive region?
Ingham: There are a lot of companies considering leaving California, and there are basically two reasons why they’re doing it: for tax/incentives and labor regulations. But what you also don’t hear about are the companies who are headquartered here, but moving divisions of their companies to other regions that do not need to remain in California. By example, international companies are making choices to expand outside of California as they grow, for positions that do not need to be in the Golden State. It’s a very common thing and is typically not published.