Large holes of space in Orange County’s biggest and best office buildings are quickly filling up, particularly near John Wayne Airport, and area brokerages say few development projects are in the pipeline to boost supply.
In the first quarter of 2010, following the early fallout from the recession and the area’s subprime mortgage meltdown, the county had 34 blocks of contiguous office space totaling more than 100,000 square feet available for lease, according to data at the time from the Irvine office of tenant brokerage Studley Inc., which now operates under the name Savills Studley.
Just 10 properties fitting that bill remain available, according to Costar Group Inc. data.
Even finding smaller blocks of space is a chore for tenants.
OC had just 25 class A office properties with a contiguous block of 50,000 square feet or more at the end of last year, according to Savills Studley.
“Leasing activity during 2014 has depleted the region’s supply of big blocks of available space,” said Savills Studley Executive Vice President Royce Sharf.
All told, there were 2.1 million square feet of positive net absorption in OC’s office market last year, pushing down the vacancy rate to nearly 12%, its lowest since the Great Recession, according to year-end data from the Irvine office of Voit Real Estate Services.
Strong leasing activity has continued into the new year as two big empty spaces in the airport area—home to about half of the county’s nearly 45 million square feet of class A office space—got snapped up in the first few months.
In February, Irvine-based Hyundai Capital America Inc. announced it would consolidate at the 4000 MacArthur office campus in Newport Beach a big chunk of its local operations.
The automobile finance company, part of South Korea-based Hyundai Motor Group, signed for 178,000 square feet at the two-building complex, taking up one of the two 10-story towers at the campus at the intersection of MacArthur Boulevard and Jamboree Road.
The other blockbuster lease disclosed so far this year was by Ingram Micro Inc., the county’s largest company by sales. It signed a nearly 175,000-square-foot lease at the low-rise portion of the Park Place office campus in Irvine in a deal that runs for more than 10 years starting this summer, according to real estate sources.
The technology company hasn’t disclosed plans for the building. Sources say it will move its headquarters from Santa Ana to Irvine as a result of the lease.
The Hyundai Capital and Ingram leases are particularly “representative of improving market fundamentals in the greater airport area office market,” said Don Yahn, executive director of the Irvine office of Cushman & Wakefield Inc. who represented Hyundai Capital in its lease.
The airport area’s asking rents increased 25.6% over the past year, according to Cushman & Wakefield data.
Only one big block of high-end office space sits vacant in the airport area: the former Washington Mutual campus at the intersection of Main Street and Von Karman Avenue.
Three of the five offices at the campus, now called Quintana, have been empty for more than five years. Palo Alto-based Menlo Equities LLC bought the buildings about four years ago with the stated goal of landing a large tenant to take up the bulk of nearly 368,000 square feet of vacant space. The efforts haven’t panned out; Hyundai Capital reportedly was considering leasing space at Quintana before settling on the 4000 MacArthur campus.
Waiting in Wings?
Other new airport-area projects could be making their way into the development pipeline, but their backers appear to be cautious as they try to sign anchor tenants for the projects first.
That’s a change from the area’s last big office boom just prior to the recession, when more than 1 million square feet of speculative office tower space was built in the airport area.
Notable projects on the drawing board include 17850 Von Karman Ave., a 242,000-square-foot building proposed for property on the opposite corner from Quintana near Main Street and Von Karman. Backers for the nine-story project, Houston-based developer Hines Interests LP and L.A.-based private equity firm Oaktree Capital Management LP, have said they are “absolutely focused” on getting the project under way this year.
LBA Realty in Irvine, owner of much of the Park Place campus next to the San Diego (405) Freeway, is also said to be considering a build-to-suit office as large as 400,000 square feet.
Plans for multiple office buildings on Jamboree Road near Michelson Drive could get started in the not-too-distant future, as could creative-office projects at the Tustin Legacy development, according to real estate sources.
Meanwhile, the lack of active development “is beginning to work in leasing managers’ favor,” according to a recent report by Marcus & Millichap Real Estate Investment Services.
The lack of development, combined with strong leasing activity and rental increases, makes OC the country’s fifth best market for office investments, according to Marcus & Millichap.
