Creative Redevelopment Presents Challenges

IRVINE, CA—Office owners need to find successful ways to meet the demand for creative space in Orange County when redevelopment is the only option and the raw materials don't always pencil, say executives preparing to speak at RealShare Orange County at the Hotel Irvine on August 21. (Early-bird discounts for the conference are available until Friday, July 25, so click here for more information.)

Joe Bevan, CCIM, EVP of JLL, tells GlobeSt.com, “The occupier space pendulum continues to swing toward a more open and collaborative environment. Even more-traditional occupiers want to be 'corporate creative' to retain current talent and attract new. The solve for office-building owners in Orange County is how to meet this demand by converting product that is not old enough to be cool (i.e., SOMA) and not new enough to configure open space smartly. Owners who have figured it out have lower vacancy with higher rent.”

Kurt Strasmann, senior managing director with CBRE, adds that there is no standard for creative office, presenting another puzzle to solve. “Users have different types of needs, and it changes from user to user. This is challenging for developers and owners, as well as the cost to modify existing space.”

The positives, Strasmann adds, are that that there has been a consistent demand in the county for class-A space in lease markets, and that spec-ready office suites between 1,000 square feet and 5,000 square feet have been “extremely successful. Owners who have invested in renovating spec suites are reaping the rewards of increased ease rates and faster lease-up. This has been a very successful strategy.”

In addition, fundamentals are strong for the Orange County office market, which absorbed 1.1 million square feet of positive net absorption in the second quarter. Greg May, EVP/regional managing director for Newmark Grubb Knight Frank, tells GlobeSt.com, “This was the largest amount of positive net absorption since the third quarter of 2005, with the Airport submarket accounting for 85% of the absorption.”

May adds that the Airport and South County submarkets continue to lead when it comes to office rent increases, with the Airport up 6.2% and South County up 7.3% compared to a year ago. “With an influx of institutional investors buying office buildings in North and Central Orange County, expect rental rates to begin a competitive ascent in those markets as the new landlords begin to compete with the stronger rental rates in the more-robust submarkets. The result will be a trickle-down effect, as landlords across the board increase rates in order to keep up with this new market fundamental.”

With the lackluster performance of the first quarter of 2014 now in the rearview, the gradual recovery of the county's office market clearly shows no signs of slowing down, says May. “As the vacancy and unemployment rates in Orange County continue to decline and positive net absorption remains strong, landlords will become more bullish with rental rates as the demand for quality office space continues to drive the Orange County office market back to a healthy state.”

Jeff Manley, a principal with Cresa Orange County, points out that “the Orange County market is rapidly turning into a landlord's market. Expect rents to start rising soon from all the major landlords.” He adds that vacancy for large blocks of space is very low, and there are still quite a few small spaces available.

On the investment side, taking a calculated risk may pay off well for savvy investors, says Wil Smith with Greenlaw Partners. “Very well-located office investments in Orange County with a great per-pound basis, combined with the ability for execution of additional entitlements, should prove out to be some of the best-performing acquisitions this cycle—especially if you can convert the additional entitlements to residential.