Why OC Office Users Are Expanding

IRVINE, CA—As the office recovery continues, the pendulum is beginning to swing in the opposite direction from previously seen contractions to purposeful expansions, Stream Realty Partners' co-managing partner Blaine Annett tells GlobeSt.com exclusively. We spoke with Annett after his firm's release of Q1 2015 office stats for Orange County to find out what we should take away from it, potential headwinds for this sector and the types of properties being sought-after in this market.

GlobeSt.com: What is most noteworthy about your firm's first-quarter Orange County office stats?

Annett: The sector was just hit so hard in Orange County. It definitely suffered with the whole sub-prime mortgage crisis, and it had a lot of office space get put back on the market. That, combined with the new construction going on at that time, meant a lot of space never got filled. It's been a long, slow recovery, and a lot of companies have clear direction now and are starting to expand. Previously, they were trying to pack people into their space, but now they're expanding all across their portfolios. We're working with tenants that are expanding, and it's all adding up—whether they're moving from 5,000 square feet to 10,000 square feet or 10,000 square feet to 15,000 square feet, they're making big commitments on real estate, and rental rates are going up in Orange County. A lot of tenants who are financially sound are making the commitment to lock into their space since rates are still pretty low when compared to what we've seen historically in Orange County. We're seeing rental-rate growth, but tenants need to strike now. The tide is turning toward more of a landlord's market, especially in South County, in the Airport market. Central County is lagging behind a little bit.

GlobeSt.com: Are there any potential headwinds for this sector in the near future?

Annett: There's nothing on the horizon that we see. The most challenging question we get asked is, “What's driving all this activity?” It's a mix of a lot of different companies and diverse users. There are a lot of different companies that are driving the recovery this go-round. It's not like looking back a few years when it was all dependent on the mortgage industry as a driver. There are a lot of different pockets driving the industry now, so if one hit a bump in the road, there are still a lot of others doing well.

GlobeSt.com: Are you seeing any spec development in this market?

Annett: In 2015, we will see some different people step up on spec office development. You can see where the market's headed, and all types of companies are coming in. People will step out and do spec given the market recovering the way it has. Irvine Co. obviously is doing it, but some smaller buildings are being bought, repositioned and turned around, and we will see some local developers here break ground on office development.

GlobeSt.com: What types of office properties are investors seeking in this market?

Annett: You still have guys out there looking for value-add investment opportunities. One example is Bixby buying industrial and repositioning it into creative office. We're also seeing a lot of buyers in the market on the larger institutional side viewing Orange County as a place with a lot of growth. We lagged behind the rest of the country in rental growth, so their plan is to buy now and take advantage of future rental growth. Others are looking for well-leased product. A lot of institutional money would love to buy more of that stuff as well. For anything like that, there are multiple bidders and it's trading at very aggressive cap rates.