Supersectors Back Despite Slow Job Growth

IRVINE, CA-Despite potential threats, several factors paint a positive picture for Orange County's office market, according to Jones Lang LaSalle. Positive job growth and a relatively low unemployment rate put the economy in a good light, and positive net absorption, an active construction pipeline and a flurry of sales transactions indicate strong fundamentals.

Still, there are some points of caution, JLL reports. While the overall unemployment rate is holding steady at 6.2%, the rate at which jobs are being added is somewhat demoralizing when considering the county lost 206,800 jobs from peak to bottom in the downturn. Nearly four years into the recovery, just under half of these jobs have been recovered.

Nonetheless, the market has recorded consistent job growth since 2010, and for the first time in the post-recession recovery, all major supersectors are in the black in terms of 12-month job growth, according to JLL. Financial services and construction are the two sectors that currently lead job gains; other strong supersectors include leisure & hospitality; educational & health services; professional & business services; and manufacturing. The supersectors of trade, transportation & utilities; other services; and government have achieved modest growth, while mining & lodging is flat.

When asked if Orange County's relatively strong office fundamentals are encouraging companies from outside the county to relocate here, Jeff Ingham, senior managing director of JLL, tells GlobeSt.com, “Labor is a higher priority for companies than real estate, as labor is typically a higher cost for the company than their real estate costs. They move due to availability of labor. This could be to fill executive jobs or highly educated jobs if they are in a tertiary market. Or they may move to a tertiary market to fill call-center-type jobs.”

Ingham adds that firms move due to cost of labor in one market compared to another. “Companies tend to be less price sensitive for executive-level jobs.” He also comments that companies are moving within markets right now to better-amenitized locations in order to retain and attract good employees.

According to JLL, experts anticipate another year of positive net absorption and upward pressure on office rental rates in the county. Yet, one potential threat is exposure to the mortgage industry. Mortgage-lending firms, a staple of the Orange County economy, have thrived over the past two years thanks to low interest rates and a flurry of refinancing business. However, as interest rates climb, the faucet of refinancing activity is quickly closing, and the likely result is a reduction in mortgage-lending payrolls that would then lead to leased office space returning to the market.

The second potential issue that the market is facing, JLL reports, is the hangover from the blend-and-extend transactions that were so common between 2009 and 2011. The trend has artificially delayed some natural lease rollover, which is likely to last through at least next year, subduing leasing activity.

Nevertheless, there are several positive factors in play for the office market. Small tenants are becoming more active, and the amount of tenant expansions generally outweighs those who are downsizing. Also, the positive net absorption shown year-to-date is a product of organic growth—companies are leasing extra space based on need rather than just locking low rates based on future growth expectations, JLL reports.

While shadow space is present in some cases around the market, it does not appear to be as much of a concern to the market's recovery as it was in 2011 and 2012. Probably the best indication of the market's health is the rising purchase prices in the various tiers of assets along with the growing development pipeline. These will be key trends to keep an eye on in 2014 and 2015, according to JLL.

As GlobeSt.com reported last week, vacancy continues to tighten as available space becomes ever scarcer, lease rates have begun to increase modestly from second-quarter figures and absorption—particularly in the class-B space—is up.