OC: Next Five Years, 50,000 Office Jobs

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IRVINE, CA—The county's job growth will bring employment back from pre-recession losses and bring single-digit office vacancy rates within the next five years, Oliver Fleener, SVP of PM Realty Group, tells GlobeSt.com. The firm forecasts that the county will add more than 50,000 office jobs over the next five years, with vacancy rates dropping to 9.9% by 2016 and as much as a 40% increase in rental rates by 2019.

Using information from Moody's in a mathematical formula it has been employing successfully for the last 10 years, PMRG predicts that the county will add 12,000 office jobs this year, 13,000 in 2015 and another 13,000 in 2016. “After that, it starts to peter out,” says Fleener. “Though Moody's does allow us to forecast out, after five years it falls off the cliff. But we like the five-year average because most office leases are about five years, so we're looking at the cycle of the lease.”

PMRG also sees the greatest job growth in professional office services—including middle management and legal—as well as financial activities and education and health services. “We were expecting the mortgage industry to come back last year, and it did, but in 2014 that's going to be negative, so we're losing some jobs in that category,” says Fleener.

Considering that the county lost just under 70,000 office jobs between 2007 and 2010 due to the recession, this growth will bring it back up to speed. The employment gains since 2010, plus those anticipated as outlined above, will bring the market back to single-digit vacancies within two years, the firm predicts, although this figure is expected to bounce up a bit to about 12% by 2020 as construction catches up.

“In 2014, the bar in construction is at 800,000 square feet, and most of it is being done by the Irvine Co. in Newport Center, a market unto itself,” says Fleener. “The only other construction going on is what I call spec build-to-suit; Google and Hyundai will occupy some of the building and the rest is leased out. ”

Fleener adds that the county's biggest adversary to keeping vacancy rates low and rental rates high has been construction. “We added 20 million square feet of product over the last 10-15 years. That's a big swing. Job growth needs to absorb the new product.”

Rent-wise, the firm is projecting 40% growth over the next five years. “That raises an eyebrow, but we hit bottom in 2012 at $1.91,” says Fleener. “We went through a big valley, and we should be back at the peak at $2.74. Landlords have to be able to raise lease rates, especially with Title 24 energy-code upgrades figured into the mix. It's figured that it'll cost $6 per square foot to do the Title 24 improvements, so they will need to raise rents 10-15 cents per foot just to break even on those costs—that's a 7% increase right there that needs to be incorporated. From our low back up to our high, we need a 42% increase just to hit our peak again, so 40% is rather conservative, actually.”

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