ORANGE COUNTY, CA—With a few build-to-suits recently delivered and more nearing completion, Orange County developers are turning their attention to speculative office development, according to Voit Real Estate Services. The firm reports that the first spec building to be completed will be the Irvine Co.'s 354,000-square-foot tower at 520 Newport Center, which is ready for occupancy.

The tower, located in the prestigious Newport area, will achieve rents that indicate the viability of spec construction elsewhere in the county. Several projects are being discussed: Blizzard Entertainment, Broadcom, Vizio, Google and Toshiba are reportedly considering build-to-suit options, says Voit.

Jerry Holdner, VP of market research for Voit, tells GlobeSt.com, “As of November 15th, the vacancy rate for the Orange County office market stands at 12.15%. Historically, when the Orange County office market reaches 12% vacancy, speculative office-market conversations and construction begin, and the cranes come out.” He adds that the higher rents being achieved at 520 Newport Center are what will be needed to fuel further speculative developments.

Regarding demand trends, Orange County is going through some growing pains in the office sector, according to Voit. The risk of holding assets in a high-cost metro is that there will always be attrition from a subset of value-oriented tenants. That appears to be behind some recent space givebacks from companies like Verizon Wireless in Irvine and AT&T in Anaheim. Additionally, rising interest rates have created some losses among the county's mortgage lenders. These two factors help to explain the negative net absorption in the first quarter of the year, only the second negative quarter here since Q413.

The good news, says Voit, is that Orange County hasn't lost its entrepreneurial edge. There is enough growth among other companies and industries in the metro to limit the damage, and in all likelihood push the net number back onto the positive side of the ledge by year's end.

Investment-wise, the office market here finished 2013 with the two most active quarters since 2007 in dollar terms, Voit reports, which speaks to the maturation of the recovery. Investors are now reaching beyond the submarkets, with a large share of volume going to the Irvine submarkets. In 2009, 52% of office volume was conducted in Irvine. That share fell to an above-average 43% in 2010-11, but has dipped into the 30%s in the last two years because of increased activity elsewhere. Some of these recent non-Irvine deals include towers in Santa Ana, Orange and Costa Mesa, which had square-foot pricing in the $200s rather than the $400s now common in Irvine, but the rising liquidity is key.

Rental rates for Orange County office are solidly in the black, according to Voit, with year-over-year growth at its highest level since the first quarter of 2008. Orange County welcomed some overdue gains, given the strength of the fundamentals recovery. Over the forecast, cumulative gains here will be among the top in the National Index, passing markets like San Jose and keeping pace with San Francisco, but for new investors, more upside is concentrated in Orange County.

Regarding vacancy, the long-term trend is positive. Voit reports demand growth hit a low recently just as several large office projects started to deliver. This is more coincidence than cause for alarm. The underlying drivers of demand appear healthy and absorption is picking up again, while spec development is still muted, thus the market is not in imminent danger of overbuilding. Voit says it expects fundamentals to maintain a positive trend.