IRVINE, CA—Office owners need to findsuccessful ways to meet the demand for creativespace in Orange County when redevelopment is the only option and the rawmaterials don't always pencil, say executives preparing to speak atRealShare Orange County at the Hotel Irvine onAugust 21. (Early-bird discounts for the conference are availableuntil Friday, July 25, so click here for more information.)

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Joe Bevan, CCIM, EVP of JLL,tells GlobeSt.com, “The occupier space pendulum continues to swingtoward a more open and collaborative environment. Evenmore-traditional occupiers want to be 'corporate creative' toretain current talent and attract new. The solve foroffice-building owners in Orange County is how to meet this demandby converting product that is not old enough to be cool (i.e.,SOMA) and not new enough to configure open spacesmartly. Owners who have figured it out have lower vacancy withhigher rent.”

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Kurt Strasmann, senior managing director withCBRE, adds that there is no standard for creativeoffice, presenting another puzzle to solve. “Users have differenttypes of needs, and it changes from user to user. This ischallenging for developers and owners, as well asthe cost to modify existing space.”

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The positives, Strasmann adds, are that that there has been aconsistent demand in the county for class-A space inlease markets, and that spec-ready office suitesbetween 1,000 square feet and 5,000 square feet have been“extremely successful. Owners who have invested in renovating specsuites are reaping the rewards of increased ease rates and fasterlease-up. This has been a very successful strategy.”

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In addition, fundamentals are strong for the Orange Countyoffice market, which absorbed 1.1 million square feet of positivenet absorption in the second quarter. Greg May,EVP/regional managing director for Newmark Grubb KnightFrank, tells GlobeSt.com, “This was the largest amount ofpositive net absorption since the third quarter of 2005, with theAirport submarket accounting for 85% of the absorption.”

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May adds that the Airport and South County submarkets continueto lead when it comes to office rent increases,with the Airport up 6.2% and South County up 7.3% compared to ayear ago. “With an influx of institutional investors buying officebuildings in North and Central Orange County, expect rental ratesto begin a competitive ascent in those markets as the new landlordsbegin to compete with the stronger rental rates in the more-robustsubmarkets. The result will be a trickle-down effect, as landlordsacross the board increase rates in order to keep up with this newmarket fundamental.”

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With the lackluster performance of the first quarter of 2014 nowin the rearview, the gradual recovery of the county's office marketclearly shows no signs of slowing down, says May. “As the vacancyand unemployment rates in Orange County continueto decline and positive net absorption remains strong, landlordswill become more bullish with rental rates as the demand forquality office space continues to drive the Orange County officemarket back to a healthy state.”

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Jeff Manley, a principal with CresaOrange County, points out that “the Orange County marketis rapidly turning into a landlord's market. Expect rents to startrising soon from all the major landlords.” He adds that vacancy forlarge blocks of space is very low, and there are still quite a fewsmall spaces available.

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On the investment side, taking a calculatedrisk may pay off well for savvy investors, says WilSmith with Greenlaw Partners. “Verywell-located office investments in Orange County with a greatper-pound basis, combined with the ability for execution ofadditional entitlements, should prove out to be some of thebest-performing acquisitions this cycle—especially if you canconvert the additional entitlements to residential.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.