Pockets of Growth Define Office Sector

IRVINE, CA-While overall office leasing velocity has slowed, some areas of Orange County are experiencing considerable growth, experts at Jones Lang LaSalle tell GlobeSt.com. Jeff Ingham, senior managing director, and Bryce Mordoff, research analyst, say that if you weighed it out across the county, it appears recovery is at a crawl, but if you segment it into submarkets, “we're seeing some positive growth in some areas, and others are flat.”

As GlobeSt.com reported last week, progress in this sector has been slow and steady through the second quarter of the year. While not the dramatic improvement we're seeing in the industrial and residential sectors, the office market still looks promising.

“You could also base that on the class of product,” says Ingham. “Class A is seeing improvement, but the class B market is still flat. If you compared to several years ago, on a project-by-project basis, some of the class-A product in the airport area has seen rental growth of around 10% to 15%. As the amount of leased space is up, this has put positive pressure on rent. You can still find cheap space, but in that segment, there's upward pressure on pricing. The same holds true for areas near amenities or areas in transition such as Irvine Spectrum—those areas right in and around strong retail have seen significant growth in rent.”

Some submarkets have seen rental-rate growth of as much as 20% or higher, Ingham adds, while tertiary locations have seen zero growth. “You see a 3% growth rate across the board, but if you segment it out, we've seen some positive spikes. The market doesn't just bop along. It's like a light switch: one day the light comes on and things change pretty rapidly.”

Mordoff adds that depending on how you look at the market, the vacancy rate can still seem pretty high. “It's in the mid-teens, but considering where it came from, it's improved pretty healthily. The Orange County market was one of the hardest hit by the mortgage failure.”

If you took the office market in 2008 and added in all of the new construction, the vacancy rate would be right around 10%, which would be a pretty healthy market, says Ingham. “After overbuilding in 2008 and the mortgage bust, the market is now balancing out. People are hiring, and we're seeing positive momentum in the market, which is good.”

Ingham likens office investment to the residential market, where those who could hold onto buildings were slogging it out until it makes sense for them to sell. “As rental rates are improving, occupancies in those buildings are improving and cash flow is stabilizing, so it's starting to make sense to sell. There's a lot of interest in the market, coupled with really low interest rates and an oversupply of capital coming into the market.”

As interest rates go up, Ingham expects there will be negative pressure on pricing, so owners who have been waiting to sell are beginning to come to market, and more product is changing hands. “We still have a lot of special services controlling product in Central County. Those products have not changed hands yet. Things will improve over the next 24 months as buildings lease up; I don't think that trend is going to slow down.”