Office Tenants' Caution Slows Recovery

IRVINE, CA—Hesitancy among office users means hiring is not keeping pace with revenue growth, which is decelerating occupancy growth in Orange County, Savills Studley's EVP, branch manager, Royce Sharf tells GlobeSt.com exclusively. We spoke with Sharf about why tenants have been so cautious, the type of space they are seeking and the Orange County office market in general.

GlobeSt.com: What is making tenants so cautious in the Orange County office market? How is this caution likely to change in the coming months?

Sharf: American business is simply more cautious at this stage of the economic recovery. Orange County follows that same trend. The most direct impact of this cautious perspective is that hiring is not keeping pace with revenue growth.

GlobeSt.com: What types of office space are tenants typically seeking and why?

Sharf: Perhaps for the first time, we are definitely seeing a meaningful interest in creative-office solutions. In addition, tenants are making every attempt to densify their space planning. This trend, found for years in most other markets outside of the US, is here to stay. This will have a significant impact, increasing the strain on parking availability, building systems, etc.

GlobeSt.com: Aside from the Airport submarket, are there any other submarkets where the office sector is becoming stronger?

Sharf: Yes. Both Newport Center and Irvine Spectrum are clearly strong submarkets. The Irvine Co. is the largest owner in both submarkets. While the Irvine Co. faces a multitude of direct competitors in the Airport submarket, it enjoys dominant control over these two submarkets. Such market dynamics allow for extraordinary rent growth. In fact, the Irvine Co. is bullish enough to build speculative high-rise office product in both submarkets. That is unique compared to anywhere else in Orange County.

GlobeSt.com: How are office rental rates likely to change over the next year, and what are the factors affecting this change?

Sharf: After several consecutive years of soft and lagging rents, it is quite likely that OC office rental rates will show appreciation over the next year. This trend has already started to manifest itself in the better buildings and submarkets and largest contiguous blocks of space.