How Irvine Co.’s San Diego Foothold Could Impact the Market

The Irvine Co. has bee aggressively buying office properties in San Diego this year. In the last 12 months, it has purchased 1 million square feet of office space. In some cases, the investor has purchased properties at record prices and with all cash. While the buying spree is certainly a telling sign of the strength and future growth of the San Diego market, it also could mean that the company will soon have enough market share to control rents.

“Anytime you have an owner that controls that much product in one market, from a tenant and landlord standpoint, they have market control over rents,” Tim Olson, managing director at JLL, tells GlobeSt.com. “Historically, Irvine has managed their buildings more for occupancy, meaning that they will drop rates drastically in a down market. They can also push rates drastically in an up market. From a tenant standpoint, their risk is how high are they going to push rates when vacancy rates begin to decline. In the last downturn, they dropped rents by 100%.”

The San Diego market, in general has had a phenomenal year for office with record breaking rent growth and strong absorption. Irvine Co. is positioned to take advantage of the current market dynamics, especially in growth areas. “San Diego is hitting record pricing from a building sale standpoint,” says Olson. “Irvine is a well-oiled machine, and they have been acquiring assets in UTC and Del Mar Heights more aggressively than they have in the past.”

Even if the Irvine Co. has control over rents, Olson expects the market to continue to outperform in 2019. “Based on the continued absorption and tenant demand that we are seeing, there will continue to be strong absorption in most of our major markets,” he says. “With that, I think we will see increasing vacancies and decreasing rental rates, especially as buildings continue to sell.”

The momentum next year will be fueled by continued demand paired with limited new speculative construction. At the moment, San Diego’s speculative construction projects are One Paseo, which is preleasing, and the Palladium redevelopment projects. “There isn’t an overwhelming supply of speculative development, and people have been more calculated in their investments,” says Olson. “I think that will soften a dip whenever it happens, but I don’t have a prediction as to when it will happen.”

Despite the rent growth in the market, rents haven’t increased to a point where speculative development is justified. “Spec development is all contingent on rents. We are approaching a historical peak, and rents have to be at point where they justify speculative construction,” says Olson. “We have increasing rental rates, but the developer has to determine if it makes sense for their return threshold.”