The Irvine Spectrum office market is by most measures the best-performing submarket in Orange County these days: Empty space is scarce, a flock of new and expanding companies call the area home, rents are rising, and new development is in full bloom.
The office market—which surrounds the Spectrum shopping center—also faces some big questions, particularly in terms of potential vacancies and corporate moves.
Close to 3 million square feet of empty office and flex space could come onto the market over the next few years, factoring in speculative development and existing space that large companies are vacating. That’s a big figure for the Spectrum, an office market with close to 160 leasable buildings, which most local brokerages say encompass 10 million to 11 million square feet. It’s the largest office market in South OC.
The direct vacancy rate at Spectrum buildings stood at 5.7% at the end of the first quarter, the lowest of any major office market in the county, according to data from the Newport Beach office of CBRE Group Inc.
The overall OC office market, which runs a little more than 100 million square feet, had an average vacancy rate of about 10% at the end of the quarter, according to CBRE’s data.
Vacancies at buildings owned by Newport Beach-based Irvine Company, the dominant property owner in the Spectrum, are below the market as a whole and are now at an all-time low, according to Steve Case, executive vice president for Irvine Co.’s office division.
The company’s established base of high-rise area offices, which totals about 1.3 million square feet, is more than 99% leased, and its new 200 Spectrum Center tower, which opened in March, is already about 60% full. Its midrise and low-rise offices in the market, which come to an additional 4.2 million square feet, are close to 98% leased, Case said.
“It’s the highest level of demand we’ve ever seen,” he said.
That’s one reason the company began work this year on a second, 21-story office tower at 400 Spectrum Center, and it has several midrise buildings in the works a few miles away on Sand Canyon Avenue.
The burst of development will add nearly another million square feet of office space to the Spectrum market.
“It’s a phenomenal environment,” Case said of the Spectrum. “The last several years it has really outperformed (Orange County as a whole).”
Newport Beach-based Voit Real Estate Services estimates the monthly average rent in the Spectrum office market at $2.82 per square foot; OC’s overall office market is at $2.32 per square foot.
Rents in the Spectrum area are up about 10% over mid-2014 levels, according to Voit.
Questions Loom
The area’s office market has its share of uncertainty, thanks in large part to a handful of sizeable official and rumored corporate moves planned in the not-too-distant future.
The deals would lead to a large amount of empty space coming online around the time the new Irvine Co. development wraps up, which could result in area vacancy rates increasing and rents softening.
“The market has gotten better, but ironically there’s now more going on for tenants than we’ve seen in years,” said Jeff Ingham, senior managing director for the Irvine office of Chicago-based JLL.
For larger tenants seeking a long-term deal in the area, “it’s as good a time as any (in recent years)” to explore looking at potential options, Ingham said.
The biggest question mark concerns the future of Broadcom Ltd. and the chipmaker’s Spectrum campus being built on the southern edge of the former El Toro Marine base.
The Singapore-based chipmaker, which has its U.S. headquarters in San Jose, is constructing four midrise buildings at its 73-acre Great Park Neighborhoods site near the intersection of the San Diego (I-405) and Santa Ana (I-5) freeways and close to the train station in Irvine.
The roughly 1.1 million-square-foot Spectrum-area project, which broke ground about a year ago, is the largest commercial office project to be built in Orange County in about a decade.
Multiple real estate sources tell the Business Journal that Broadcom is exploring a sale of at least two of the buildings under construction (see related story on Five Point, page 1).
It’s believed that the company no longer needs the space following a heavy dose of layoffs after the chipmaker—previously known as Broadcom Corp.—completed its $37 billion sale to Avago Technologies Ltd. The deal ended Broadcom’s 20-year history as a locally based company.
An asking sales price in excess of $200 million, or more than $400 per square foot, is rumored for the two offices, sources tell the Business Journal. Broadcom hasn’t commented on a potential sale, which would allow it to recoup part of its land costs, in addition to construction costs.
The company paid about $156 million for the site, factoring in land prices, taxes and other fees, in March 2015, after announcing in November 2014 that a deal was in place.
Broadcom, long OC’s largest office tenant with its current headquarters in Irvine’s University Research Park, isn’t the only big company with changes in store for Spectrum-area operations.
Toshiba Corp. last month told the Business Journal that it was putting its massive Irvine office facility on the market and looking for space to lease elsewhere in Orange County.
The Tokyo-based company—whose Toshiba America Inc. subsidiary makes a variety of electronics, printing and storage systems products through locally based business units—plans to list for sale a 26-acre office and industrial campus it owns in Irvine Spectrum.
The two-building property at 9740 Irvine Blvd. has about 450,000 square feet of office, manufacturing, warehouse and distribution space. It’s the largest OC facility for Toshiba, which is the third largest foreign-owned company with operations here, based on employee count. The campus houses about 800 Toshiba employees.
Company officials said they’re looking for a new location for existing operations, preferably close to the current campus.
“We’d prefer to stay in the area” but would explore options elsewhere in OC, a company spokesperson said last month.
It plans to lease space at its new local office, the company said.
Mazda North America Operations already has announced a new Spectrum home. The automaker said a few months ago it would lease 102,000 square feet on five floors of Irvine Co.’s 200 Spectrum tower for its North American headquarters.
It will vacate a nearly 126,326-square-foot, five-story office it leases nearby at 7755 Irvine Center Drive that owner Menlo Equities in Palo Alto recently listed for sale. Brokers with the local offices of Eastdil Secured and Cushman & Wakefield Inc. have the listing for the property, where tenants to replace Mazda are yet to be announced.
No Irvine Co. Changes
Expected and potential moves of some of the area’s largest office occupants aren’t keeping Irvine Co. from proceeding with its area development push, Case said.
“It’s business as usual for us.”
The specialized uses of the Broadcom and Toshiba sites likely mean that any future users of the buildings wouldn’t be the same types of larger tenants that Irvine Co. is trying to secure for its newer offices, he said.
“It would probably take a unique (company) that’s highly specialized,” for instance, to fill Broadcom’s under-construction offices, which have been designed to accommodate a high-tech tenant, Case said.
The addition of empty space to the market shouldn’t hit too hard, thanks to a growing population of South OC residents searching for jobs closer to home, he said.
The Irvine Spectrum “has developed into a great workplace community. It’s where highly educated workers live and want to work.”
