Real Estate Watch: South Orange County
Signs of Rebound as Office Tenants Head for South County
The South Orange County office market inventory continues to grow and is approaching almost 20 million square feet. The area has surpassed Central County as the No. 2 OC office market based on net rentable area behind the John Wayne Airport area.
South County is one of the most desirable locations in the county because it has a labor pool, new infrastructure, housing, good amenities and a great climate, among other reasons.
South County is home to many new “campus-style” office developments, which typically have amenities such as health clubs, cyber and coffee bars, greenbelts, sitting areas, large bandwidth capabilities and proximity to retail. Campus-style facilities were designed to help tenants attract the best personnel. Many companies such as Aliso Viejo-based Fluor Corp. moved south to South County after analyzing where their workers live.
So why is the South County office market suffering from high vacancy rates?
A large number of office tenants in South County were,and still are,technology related. Prior to the technology bust, these companies typically leased almost double the amount of office space that they actually needed in anticipation of rapid growth. Developers rushed to start construction on new projects during the boom also in anticipation of rising demand.
But the market collapsed in 2000 as the tech bubble burst. To cut costs and stay in business, many companies laid off employees and purged their unnecessary office space at huge sublease discounts.
But construction already was well under way and didn’t just stop midstream.
More than 1.5 million square feet of new office space in South County came online in 2001. More second-generation office space became available as sublease or abandoned space.
The South County office market seemed dead, with virtually no active office tenants in the market for new space.
But activity increased in the first half of this year. Landlords with aggressive marketing campaigns have attracted a majority of the new office tenants. Tenant retention has become more important for landlords.
Many companies are relocating to South County because of the office market’s current perceived value. Effective lease rates in the South County could start to crank upwards as early as the second quarter next year if this level of leasing activity continues through the end of the year,barring any national terrorism incident.
It is important to note that, even with pre-2000 annual leasing activity levels, it could take several years to burn through the huge inventory of available office space in South Orange County.
Dillon is a vice president in CB Richard Ellis’ Newport Beach office.
