A new trend seems to be emerging in Orange County: Proposed office building projects are being replaced with plans for high-rise residential development.
Several sites previously reserved for future office development have been rezoned for residential condominium construction. Ten high-rise residential projects either are planned or under construction.
In contrast, only two class A office projects are under construction,4 and 5 First American Way,and both are expansions of an existing owned corporate headquarters.
Orange County is one of the fastest-growing counties in the nation by population. Steady, prolonged growth is expected to continue during the next 20 years. As a result, there is,and will continue to be,a shortage of living space.
Many developers now appear to believe that the best use for infill areas is vertical residential development.
Only a finite number of entitled, developable office sites still are available. Not only does this lack of future sites create a significant barrier to entry in the market, it adds to the already strong upward pricing pressures on the office real estate market.
Recovery Is Under Way
Widespread evidence points to the Orange County real estate market having turned the corner. Both overall and class A rents have slowly regained their footing, returning to,and slightly exceeding,year-ago levels.
The county’s availability rate has declined during the past six quarters. For leasing, the third quarter was the strongest so far this year, with activity comparable to the 2003 pace and well above 2001-2002 activity.
Even if an economic recovery is under way, however, Orange County landlords do not believe that the time has come to raise rents significantly,providing a window of opportunity for tenants.
Too many unpredictable factors, including energy prices, the war in Iraq, interest rates and the election outcome, still could influence the local economy.
If the economy continues to rebound, increasing cost pressures and the dwindling supply of space should cause rental rates to increase.
Tenant Costs Rise
Although rents are not increasing significantly, other occupancy costs are rising.
Tenants are facing much higher costs for space build-outs. Construction costs are increasing substantially as a result of material shortages,especially for steel and drywall. These shortages also have lengthened construction schedules, further increasing costs.
Still, in the face of such rising costs, the value of tenant improvement allowances landlords are providing remains flat or has even declined.
These pressures are expected to continue through 2007.
This widening gap between construction costs and landlord contributions should favor lease renewals in the near term.
Investment Sales Active
There is a vast amount of capital flowing into office real estate in Orange County. The market is overflowing with investors.
During the past 12 months, the county posted sales volume of about $1.7 billion. Buyers include Maguire Properties, Wells Real Estate Funds, American Realty Advisors, TA Associates Realty and Global Innovations Partners.
,Analysis by Studley
