Ground-Up Office is the Next Big Thing

NEWPORT BEACH, CA—Encouraged by the Irvine Co.'s Fashion Island and Irvine Spectrum office projects, developers will once again be moving dirt for new Orange County office projects, CBRE's senior managing director Kurt Strasmann tells GlobeSt.com exclusively. After the release of the firm's Orange County Q4 2014 report for office, industrial and retail, we spoke with Strasmann about the highlights and what he expects to see down the road for this market.

GlobeSt.com: What are the highlights from these Orange County Q4 2014 reports, from your perspective?

Strasmann: In office, we have the best news of all the sectors. We've had a very diversified and strong user demand. Originally, the recovery started with corporate America, and then it moved to regional companies and now it'd down to small business. It's really hitting on all cylinders, which is most evident by the net absorption of 2.6 million square feet in 2014—almost 1 million square feet in the fourth quarter. This represents very significant demand, and it's diversified by industry type and size. And rents are starting to move. We anticipate big rent movement in 2015—between 5% and 10%, depending on the market. Landlords are feeling it, and those users who have not been in the market may have sticker shock to start. It really evolved out of creative office—Bixby Land is now working on its third project in Orange County in that sector, and other buildings are being modified. These are not one-size-fits-all renovations, but they're being rewarded with space getting leased up faster and premium rents being collected.

In industrial, Orange County has been one of the most sought-after markets the last couple of years from an ownership standpoint because of its low vacancy and consistent demand. At 2.7% vacancy, it is the second-lowest in the country. Two large projects were delivered—Anaheim Concourse and the Yokohama Tire Corp. building—bringing 1 million square feet total online, which added to the vacancy a bit, but there has been strong demand on both of these projects. Lease rates have been stagnant—they haven't changed as much as we had anticipated—but we should be seeing lease rates spike in Orange County this year based on demand. We're also anticipating very strong rent growth this year—7%. There has also been aggressive sales-price growth—it was up nearly 10% last year, and we're anticipating the same this year. It's due to the strength of the market—there are a lot of local and regional players, so it's a smaller-deal market than the Inland Empire, but their first choice is to acquire rather than rent property. The interest rates are low, but there's a real lack of supply, which is driving prices up.

Overall, the fundamentals in office and industrial are hard to beat in Orange County. Job growth is the number-one factor, and there's a limited supply of quality space and consistent demand. Both office and industrial are deep, diverse markets.

As for retail, consumer confidence is up—it's at a seven-year high right now—and job growth leads to consumer spending, which drives retail. It has been found that people still prefer to buy in stores rather than online, although certainly the younger generation is much more e-commerce centric. Most importantly, the lowering of gas prices directly affects the consumer and should be benefitting retail tremendously. Retail vacancy here dropped from 4.7% to 4.5%, the lowest vacancy in three years. Rents are consistent and stable, and we're expecting rent growth at about 3.5% over the next 12 months.

GlobeSt.com: What do you feel is the big question mark for Orange County's commercial real estate?

Strasmann: I think the fundamentals are laid out for you. There are a number of sectors contributing to the success of commercial real estate here, and there's nothing that would derail it. Unless something political or economic occurs that's unforeseen, it should remain strong.

GlobeSt.com: What areas of untapped potential do you feel exist in Orange County?

Strasmann: In 2015, I think you're going to see a couple of office developments come out. The Irvine Co. has had success with its Fashion Island and Irvine Spectrum office buildings, and I think you will see two or three office developments come underway. That is one of the untapped areas: ground-up development in office. It's certainly the same for industrial, but there are not as many opportunities for industrial land to get developed. Multifamily continues to be strong, but the big story is in office projects in the Airport area and South County—that's where the demand is.