Small Users Driving Office Improvement

ORANGE COUNTY, CA—Small-office users are driving a significant share of the office-sector improvement in Orange County, according to a report from Marcus & Millichap. The trend is a welcome sign after mostly large firms had the wherewithal to take down space in the preceding two years.

M&M says the average lease signed in the first half of the year was approximately 3,200 square feet, down from 3,600 square feet in the second half of 2013. Average lease footprints have declined steadily since 2011, an indication that small-space users are growing more confident in the economic recovery. GlobeSt.com was unable to reach M&M before deadline to discuss specifics or any similarities among these small-office users.

By year-end, office-space demand will eclipse the pre-recession high, though both office-using employment and occupancy will fall short of the previous bests, the firm reports. However, the prior high watermark for occupancy is an unrealistic barometer due to the pent-up demand that existed in the county before the bottom fell out of the mortgage industry. Equilibrium vacancy is closer to 12% to 13%, and that level could be attained in 2016 as speculative construction remains sparse.

Developers here are mainly focused on build-to-suit projects, M&M reports. A new office tower on Fashion Island, which already has low vacancy and high demand, is the lone speculative development underway. The largest project completed thus far in 2014 is PIMCO's 380,000-square-foot building in Newport Beach. The class-A property at 650 Newport Center Dr. came online in the second quarter.

M&M predicts that construction will peak this year as 1.4 million square feet come online. Pre-leasing for the remaining office space under construction is approximately 60%, though sufficient demand should keep vacancy trending lower. In 2013, 350,000 square feet was delivered.

As GlobeSt.com reported last week, the demand for creative-office space in Orange County is high, and the supply is low, according to RealShare Orange County panelists. Bob Duncan, Jr., senior development partner of Caribou Industries, spoke of the renaissance of Santa Ana and his firm's development of One Broadway Plaza there, calling it a high-rise vertical office campus that is the next phase in office for Orange County. The amenity-rich, pet-friendly property will feature a 16-country world-cuisine food emporium, indoor virtual-reality world of gaming, state-of-the-art performing-arts theater, rooftop heliport and alfresco rooftop dining with a view of Catalina Island. Duncan touted the new development as “the incubator for your company.”