Tech Investment Jumps 22% in 1Q18

Tech investment in Orange County jumped 22.5% year-over-year in the first quarter 2018 with $67.7 million in tech capital investment, according to a report from JLL. The majority of this capital, $34.8 million, went to software firms, and the average investment size was $5.6 million. In 2017, tech investment totaled $381 million in Orange County, but in 2016, tech investment reached $669 million. With this surge at the start of the year, the market may be on track to surpass last year’s numbers. To find out more about this investment activity and how it is impacting the office market, we sat down with Scott Wetzel, VP at JLL.

GlobeSt.com: What drove this surge in tech investment in the first quarter of 2018?

Scott Wetzel: One of two deals can move the needle in a significant way. Looking at it year-over-year, it might shift more but it will require patience to see what the overall trend is. What this does indicate is that there is a healthy appetite by VC firms for these types of quickly scaling companies, and those companies have a strong presence in Orange County. In many way, Orange County’s office market is considered a small-tenant market, but I really think that speaks to the level of entrepreneurialism in Orange County, and I think that is why you are seeing this activity.

GlobeSt.com: In 2016, Orange County had nearly double the amount of VC activity as 2017. Do you think that this surge at the start of the year means activity will be more in line with investment 2016?

Wetzel: I think it does. We are coming out of the gate with a hotter start this year, and I think that is a good sign. In 2016, there was a very large funding round for Cylance, which is a pretty large cyber security firm in Irvine. I believe that deal made up a disproportionate contribution to the numbers of 2016. I think one or two large deals could hit, and it throws off the average. I think it is an anomaly occurring rather than a downward or slowing trend.

GlobeSt.com: How does venture capital investment impact the office market?

Wetzel: It is really exciting for us. When a company like that gets a healthy round of funding, it is almost always so that company can reinvest into its business. Usually that means hiring a new round of employees and that the company is getting ready to scale. They are moving out of the level-one category to the tier two or three level where they are starting to higher a chief operating officer and a CFO. From a real estate standpoint, any time you have scaling, it is a positive sign because there is a direct correlation between hiring and the impact on office space. It means that companies are going to be leasing new space and contributing toward what will end up being positive net absorption in the market.

GlobeSt.com: Which submarket has become the tech-hub of Orange County?

Wetzel: Some people may tell you that it is the Spectrum and another person may tell you that it is the airport area. I think that it is a two-pronged capital for tech. Tech companies are in one of those two markets. They are in one of those two markets, and they are definitely not in Central Orange County. By and large, tech companies are choosing to go to the Spectrum submarket or the airport area. The choice is a personal one, and is often based on the labor pool. A lot of these companies are trying to figure out the location that gives them the shortest commute for employees.

GlobeSt.com: What is driving tenants to these markets. Is it availability of creative office space?

Wetzel: The Spectrum started the creative office trend in this market, but the Airport Area has quickly caught up. We have seen hundreds of thousands of square feet of traditional office converted to creative tech campuses. That has drawn people to both markets. The Airport Area also has the airport, which is convenient. The Spectrum, on the other hand, is one-stop shopping and, because the Irvine Co. is the predominate landlord, there is some more lease flexibility as long as you stay within the portfolio. Those are really the top reasons why tech companies have been attracted to those two markets.