Diversification May Prevent Vacancy Increase

IRVINE, CA-Despite a return to the Orange County office market after the mortgage bubble burst back in 2008, mortgage-lending companies don't pose a potential risk for another bubble to burst, Bryce Mordoff, senior research analyst for Jones Lang LaSalle, tells GlobeSt.com. With much more controlled growth, a a tenant base of diversified industries and various-sized tenants occupying office space here, the market isn't putting all its eggs in one basket anymore, greatly reducing the possibility of huge negative absorption if the lending market should crash again, he says.

As GlobeSt.com reported earlier today, through most of the 2000s, up until the housing crisis in 2007-2008, mortgage lenders abounded in the Orange County office-tenant market, which is why the crash was especially hard on this market. However, the office sector is much less exposed to the volatile industry than it was at its peak, JLL reports. Since the housing collapse of 2007, the market has undergone a prolonged recovery that has seen technology and healthcare-related companies lead a much more diverse economy. The recent return of mortgage-lending companies to the market in response to low interest rates and refinancing activity does not begin to match the levels reached before the collapse, which should assuage fears over another catastrophic collapse to be felt by the Orange County office sector.

“Being in Orange County, the hotbed of the mortgage-lending industry, there's always a big concern over how the overall industry and the commercial office market are performing,” Mordoff says. “The rebound we're seeing today is almost half of the exposure we were seeing in the previous bubble. We still have a very large presence of these large mortgage-lending companies like Cash Call and Greenlight expanding rapidly, but if you compare Ameriquest—which was averaging 2 million square feet prior to laying everybody off and shutting its doors—to Cash Call, one of the most aggressive tenants in the Orange County market today, Cash Call is only occupying 500,000 square feet. That's significantly smaller.”

Mordoff says even if there was a huge retraction that would cause the mortgage lenders to shut their doors, which is of concern with rising interest rates, it won't have the impact on the commercial office market that it did in 2006 and 2007. One of the reasons is that other industries have emerged to absorb office space left by the mortgage lenders after the crash, “The technology and life sciences industries in Orange County led the recovery in 2007 and 2008, and today they are still leading the recovery. If the mortgage industry took a nosedive, other industries would keep it afloat.”

Aside from industry diversification, there is also size diversification in the market lending it stability. “Small tenants are coming back to the market a little bit,” says Mordoff. “Large companies have been active, and now the small tenants are starting to reemerge. This is evident in the class-B stock, which has been a lagging sector to the trophy class-A properties. This is a positive for the market right now.”

Mordoff adds that since the industry is cyclical, when the mortgage lenders do retract, all of the above factors should prevent a catastrophic loss in occupancy from happening again.