SAN DIEGO—What goes into creating an area with a big price tag? A little art and a little science, experts from JLL tell GlobeSt.com. The firm's recently released report about the most expensive streets on which to rent office property in America revealed that Orange County, CA's Newport Center Drive in Newport Beach came in at #10 on the list overall and also came in at #5 most-expensive suburban street in the US, displaying vacancy near 11% and rent growth of 3.3% since 2013, with 2015 average rent at $51.72 per square foot. In addition, San Diego's El Camino Real ranked at #12 for all streets in the nation and #7 for most-expensive suburban streets, with an average full-service rent rate of $45.84. The rental rate represents a 5.8% increase from two years ago, when JLL last surveyed the most expensive streets in the US, but also a serious discount from San Francisco Peninsula's Sand Hill Road at an eye-popping $141.60. We spoke exclusively with San Diego-based EVP Bess Wakeman and Orange County-based managing director Ronda Clark about what it takes to develop streets where the cost to rent is high.

GlobeSt.com: What goes into creating an area where real estate is in such high demand that it contains one of the most expensive streets in the country?

Wakeman: There are many factors that contribute to the high desirability of certain streets within a market. A few key elements are:

  • Clustering: The gravitational pull for tenants to locate near money sources (venture-capital funding, private capital, hedge funds etc.), similar industries or their competition. In San Diego, Qualcomm calls the Sorrento Mesa submarket home. Other tech firms will pay a premium to locate in Sorrento Mesa solely to be near the Qualcomm "mothership."
  • Proximity: Nearness to executive housing and short commutes or access to a dense employee base that is skilled in a particular specialty can drive up rental rates. In San Diego, El Camino Real, as known as "the King's road" and the path that Junipero Serra took when founding the historic California missions, is the most expensive street due primarily to its proximity to coastal executive housing in Rancho Santa Fe, Del Mar, La Jolla and Solana Beach. In San Francisco, Mission Street provides access to the Transbay redevelopment and a highly skilled tech workforce.
  • Quality of product: Newer construction can draw tenants from older, more traditional locations. For example, Mission Street in San Francisco has lured tenants from nearby California Street. Newer product also tends to incorporate more sustainable features such as solar power, reclaimed water, natural air ventilation and access to outdoor space via balconies and green rooftops. These sustainable practices are becoming a huge draw for companies that promote corporate social responsibility to their employees and customers.
  • Amenities: Restaurants, retail, hospitality and entertainment, both onsite and within walking distance, are becoming must-haves for tenants and are used for both recruitment and retention. Boylston Street in Boston actually offers more retail and hospitality than office space.
  • Name recognition: Regardless of all the other factors, for some streets it's all about the name: "Wall Street," "Pennsylvania Avenue" and "Avenue of the Stars" are examples of streets with instant 'street cred.' This name-brand cachet inherently builds in a rent premium at these locations.

Clark: To become one of the most expensive streets in the country, it always begins with an iconic location, compelling architecture (e.g., Frank Gehry or I.M. Pei) or a major brand tenant. In the case of Orange County's Newport Center Drive, the area is iconic due to its proximity to the Pacific Ocean, the California lifestyle, and the concentration of major financial, real estate and legal firms such as the PIMCO and Irvine Co. headquarters. This iconic location, combined with Newport Center's abundance of high-end retail, hospitality and entertainment amenities, access to prestigious residential neighborhoods, immediate adjacency to several private country clubs, yacht access to Newport Harbor and wrapping views from Laguna Beach to Palos Verdes, make it a destination landmark both locally and globally.

GlobeSt.com: Which elements are necessary to have in these areas to create such high demand and high rent/sales prices?

Wakeman: San Diego's El Camino Real, in the Del Mar Heights submarket, can lay claim to providing all five elements noted. El Camino Real's average rent of $3.82 per square foot, per month, fully serviced, is a 55.3% premium compared against the average San Diego market office rent of $2.44 per square foot per month, fully serviced. El Camino Real's average rent is also a 10% premium compared to the average for the Del Mar Heights submarket rent of $3.47 per square foot per month, fully serviced.

Clark: To create the highest demand and subsequently the highest rents, one needs the culmination of the following five factors: 1) brand identity, 2) increased prestige/cachet associated with the street, 3) adjacency to C-suite residential, 4) competitive corporate dynamics and 5) the ability to attract/retain workforce talent through a location that provides a dynamic workplace environment. Looking at the Orange County offices that command the highest rents, they are tied to the locations that offer a workplace environment that meet the needs of its tenants through the availability of housing, retail, wellness, and entertainment amenities for residents. There is a direct correlation between the offices' proximity to entertainment centers like Irvine Spectrum and South Coast Plaza and substantial rent premiums. Meanwhile, campus projects like Irvine's Park Place have heavily invested in the retail/wellness components and multifamily housing to spur strong tenant-demand for its office space and subsequent rate premiums. What puts Newport Center in a class of its own is that it has an abundance of these elements combined with world-class locale that drives prestige, increases brand recognition and offers the unparalleled talent recruitment and retention—all of which results in increased revenues for a tenant's business.

GlobeSt.com: Which elements "cheapen" a street and make it less desirable and therefore less expensive to rent/buy there?

Wakeman: Inconsistent zoning and a lack of concentrated quality office product are elements that would detract from a street's popularity and in turn create lower rental rates. Tenants want to be "in the flow" and locate near other office tenants. If a building is in a stand-alone location or if the office product is spread out with other uses between buildings, it will be harder to command premium rental rates. In San Diego, Kearny Mesa is a submarket that is typically known for being more affordable. Most of the major freeways intersect this market, which makes it attractive to many business types, not just office tenants. For this reason, in addition to office space, there is an eclectic mix of uses in the market from auto repair to auto dealerships, box retail to manufacturing, even to expansive, single-tenant corporate-headquarters campuses. This diverse product mix is not one that promotes all the drivers necessary to command peak rental rates.

Clark: It's almost impossible to hit on every critical category (e.g., location, architecture, tenancy, amenities, etc.), but the streets/offices that fail to hit on any of these elements do themselves a disservice. A street without vision is guaranteed to miss the mark.

GlobeSt.com: What else should our readers know about expensive streets?

Wakeman: Demographics and drivers change. What is important to businesses today may not be the same tomorrow. For instance, sustainable practices wouldn't have been on the radar in the recent past, but today it is a strong influencing element. Silicon Valley became what it is today because the founder of the first semiconductor company started his business there to be near his aging mother. That innocent decision has spawned what is now home to hundreds of start-up and global technology companies, with Google, Apple and Facebook among the most prominent. A company that can't afford the most-expensive street today may be the catalyst for creating the next expensive street tomorrow.

Clark: Most of the companies that choose to foot the high bill that comes with leasing office space on an expensive street are conscientiously investing in the idea that to promote brand recognition, increase employee productivity, meet client demands and maintain a competitive edge, they need an office space and workplace experience that reflects these values. Newport Center's regional and headquarters offices are primarily high-powered professional-services firms catering to high-net worth clients and/or servicing high-value corporations. As such, close proximity to where these people live, work, and play are critical components to a firm's success. In today's competitive workforce environment, the high cost of the right office/workplace is a crucial investment to ensure business success.

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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.