Tenants Prefer Conversion Office Projects

Redevelopment office projects are driving office leasing activity in Orange County. According to a new market report from JLL, office projects that have undergone significant renovations are capturing much of the leasing activity sparking a new adage of “if you reposition it, they will come.” While renovated space as a market segment has seen healthy leasing activity and rental rates, in the third quarter, office absorption was negative 381,719 square feet and vacancy rates remained flat at 13.9%.

“The non-traditional clients that we have, like technology and action sports, are looking for new amenitized properties,” Jeff Ingham, senior managing director at JLL, tells GlobeSt.com. “There are the more creative-style properties, which are focused on the low-rise, funky conversions, and on the more corporate side, users are looking at it from an amenity standpoint. They have food, conferencing, fitness—the whole gambit of amenities that go with the project. Those are more traditional office complexes that fit the corporate users.”

Mostly existing owners—especially institutional owners—are taking on the cost of these renovations, and it is paying off. Renovated office projects command 20% to 30% higher rents. In addition to renovated office product, there is also new construction product, which commands an 20% premium on rents as well. However, Ingham says that the two product types—renovated versus new construction—attract different users. “It is a different market, and it is really apples and oranges,” he says. “Some clients want to be in the new building and some want to be in the conversion projects. There is a big pricing difference between the new buildings, which are $4 per square foot and the conversion buildings, which are closer to $3 per square foot.”

While renovated office product is driving leasing activity, more traditional office product is available at a reduced cost, which is attractive to companies most focused on costs. “If you look at the more traditional office buildings, a lot of the buildings have lower bases,” adds Ingham. “Owners of those properties are keeping their rents lower and more competitive. There is definitely a set of tenants in the market that are more focused on the economics and don’t want to pay the premium. 20-30% increase for creative office.”

In the third quarter, there was also a significant increase in the availability of large blocks of space 50,000 square feet or more. Quarter-over-quarter, large blocks of space in increased from 71 to 83 spaces in the market. Ingham says that right sizing is the primary reason for the increase in these spaces. “The majority of tenants are reducing their footprint,” he says. “That is especially true for more established companies that have grown over time. When they go to move, the only way that they can make sense of the move is by changing their footprint and making it open plan.”

Company mergers are also driving up the increase in large blocks of space. “Companies are also being acquired by groups outside of the area, and they are moving headcount out of the area to where the company is headquartered,” adds Ingham. “Overall, there is a balance in the market.”