It’s taken eight long years, but Orange County’s office market is now back to prerecession levels by one key metric: asking rents.
Monthly class A asking rents now average about $3 per square foot, according to recent data from the Irvine office of brokerage JLL.
That’s the first time since the second quarter of 2008 that the $3 mark has been hit and represents a 42% increase since 2013, when average asking rents bottomed out at about $2.11 per square foot.
The $3 benchmark is good news to ground-up office developers and creative-office redevelopers who are looking to convince tenants to pay above-market rents for new area projects, as well as to investors who’ve recently paid top dollar for offices in bets on rising rents.
Better news could be coming for the two groups, according to Jeff Ingham, senior managing director of Chicago-based JLL’s local office.
“We’re still peaking. Our market is still going forward.”
OC rents last peaked in 2007, when class A buildings had average asking rents of $3.16 per square foot.
Ingham said he projects the local market’s average rents will approach or top the 2007 peak levels by the end of the year or early next year and that increases could continue through 2018 before slowing.
Tenants with stable operations and leases expiring in about two years might find it a good time to consider renewing before the higher rents become the norm, he said.
The 2007 highs occurred just as the area’s mortgage industry—then the region’s largest source of office jobs—began to collapse, soon followed by the overall economy. OC’s economy now is in a healthier place, Ingham said.
Now, “There’s a sense that we’re in a more well-balanced environment. The job numbers in 2007 weren’t as good as they are today.”
Local class A office space in 2008 had a vacancy rate of about 17.8%; it’s 12.1% now.
The area’s office market, instead of being dominated by financial and mortgage companies, now has a mix of healthcare, technology and other sectors that are all thriving.
Mortgage tenants still can play a big part in the local office market, though.
Greenlight Financial Services, a unit of Lewisville, Texas-based Nationstar Mortgage Holdings Inc., last month signed a 152,828-square-foot lease for the 1600 E. Saint Andrews Place building in Santa Ana in the largest office lease of the past two years, not including sales-leaseback deals, according to market data.
Greenlight will take over the space vacated by Ingram Micro Inc., which moved its headquarters last year from Santa Ana to the Park Place campus in Irvine.
Sales Bringing Increases
The rising rents—and the expectation of more increases in the short term—are more than just a factor of an improving Orange County economy.
There’s also a larger selection of prominent office buildings on the market now than at any time since just before the recession, a reality that’s likely to impact tenants here in the near term.
There are close to two dozen office properties valued at more than $20 million on the OC market, according to recent data from the Newport Beach office of Newmark Grubb Knight Frank. The properties likely have a cumulative value close to $1.3 billion.
Investors buying the properties, and others that recently have bought buildings here, are likely to be a bit more aggressive in pushing up rents than some long-term owners, giving a bump to the overall market’s average asking rent over the next few quarters.
Investors in the area’s buildings are in general underwriting deals with the assumption of annual rental increases of about 3%, according to Anthony DeLorenzo, senior vice president for the capital markets group of CBRE Group Inc.
Even bigger increases can be expected in cases of investors that have bought buildings where a bulk of leases were made about three years ago, when rents were close to bottoming out, said DeLorenzo, who works in the brokerage’s Newport Beach office.
The projections actually are a bit less aggressive than those investors made in prior boom markets, he said.
“They’re being a bit more conservative in their underwriting in their rent growth because of the number of new developments that are coming on line, especially around the Airport Area,” DeLorenzo said.
New Projects Get Top Rents
A handful of new high-end buildings have opened in OC since last year whose rents are well in excess of those at a typical building here and that are likely skewing asking rents a few cents higher when factored into the overall market, JLL’s Ingham noted.
Some of the priciest leases ever seen for a large building here have taken place since Irvine Company’s 520 Newport Center Drive office tower opened in late 2014 near Fashion Island, for example.
Tarsadia Investments LLC, a private investment firm with ties to the area’s hospitality industry, this year completed an 18,000-square-foot lease to take over the top floor of the 21-story office tower, which has attracted multiple financial services firms as tenants.
Tarsadia is believed to be paying monthly rents of $8.50 per square foot or more, real estate sources told the Business Journal in March when the deal was completed. That’s more than $150,000 per month.
There had never before been reports or even rumors of a full-floor office lease in OC topping the $7-per-square-foot monthly rate, let alone $8 per square foot.
Meeting Development Costs?
It’s safe to say that leases like Tarsadia’s have helped Irvine Co. justify construction of the 520 Newport Center office, which is estimated to have cost more than $125 million.
Local developers during the last office development boom in 2007 and 2008 initially were looking to land leases at the new buildings—primarily in Irvine—with rents close to $3.50 per square foot in order to make their projects profitable.
Now market watchers cite rents in the $4.50 to $5 per square foot range as needed for a new high-end project’s success, due to rising construction costs, expensive new building designs and other amenities.
Irvine Co.’s low land basis for local projects likely gives it more flexibility in its deal making, sources say.
Top floors aren’t necessarily the ones likely to get the best rents now if a building has more going for it than height alone, according to officials with Dallas-based developer Trammell Crow Co. The company currently is putting up steel at its Boardwalk project, a two-building office development on Jamboree Road in Irvine a half-mile south of the San Diego (I-405) Freeway. It’s the largest office development planned for the market around John Wayne Airport in over a decade.
The nine-story, glass-sheathed project, whose buildings will be connected by a series of indoor and outdoor bridges, will total about 545,000 square feet when completed next year.
The developer’s sweet spot for space is 64,000 square feet, which would cover full floors at both buildings, with two 30,000-square-foot spaces connected by a 4,000-square-foot indoor or outdoor bridge.
The building’s top floors are garnering plenty of attention, though lower floors that have the indoor and outdoor bridge spaces and put tenants closer to the project’s 2-acre courtyard and associated amenities also have piqued tenants’ interest, the developer said last month.
Company officials said they have 10 proposals out for space at the buildings, with potential deals ranging from a few thousand square feet to a lease of both buildings for headquarters.
The developer is marketing the property to the healthcare and biomed sectors, law firms, technology companies and financial services firms, among others, according to Trammell Crow Vice President Chris Tipre.
