Low-rise office buildings might not get the same amount of attention in the news as the high-rise buildings in Orange County, though they’re a significant part of the office market, accounting for more than half—nearly 55.2 million square feet—of the county’s office space. One can’t ignore the level of recent activity in the low-rise market.
The activity continued to power forward in the fourth quarter, with an eye-popping 333,344 square feet of positive net absorption. Low-rise offices absorbed 641,672 square feet last year, and the fourth quarter represented close to half of that. The vacancy rate consequently dropped to 10.1%, down 8.8% from the previous year, and lease rates received a much-anticipated boost, rising to an average of $1.95 per square foot across the county.
Rates are expected to grow significantly throughout this year as vacancy continues to fall and as no new product is being developed.
It’s simple “supply and demand,” and supply isn’t increasing while demand is, so prices are bound to rise—and rise quickly.
The South Orange County submarket held the highest asking rate at $2.08 per square foot, mostly due to the Irvine Spectrum, where the vacancy rate is below 10% and prices are on the rise. Lakehills Office Park—225,000 square feet owned by AEW and one of the larger non-Irvine Company low-rise office projects in South Orange County—has increased rates 20 cents per square foot since January 2014 and continued to see a significant amount of activity.
First-quarter numbers are expected to clearly show how healthy the Orange County office market is becoming.
One interesting trend in the low-rise office market is that tenants are looking for creative or more modern office space. Many tenants want to provide their employees with a more exciting, interesting and fun work environment, for which they are willing to pay more over traditional office space. An increasing number of obsolete low-rise office buildings are becoming the targets of investors to buy and renovate into creative-office space.
Bixby Land Co. has done this throughout Orange County, recently purchasing 15771 Red Hill, a low-rise building in Tustin of about 90,000 square feet, with plans to renovate the building from the inside out and transform it from a dated project to a state-of-the-art building that will attract the new breed of tenants.
In the past, 15771 Red Hill would have been considered “commodity” space that competed on price to attract customers. With this renovation and rebranding of the building, however, it will appeal more to architects, media, technology, public relations, and design firms whose employees may choose to wear shorts and sandals or bring their dogs to work.
The outlook for the Orange County low-rise office market is positive. The market fundamentals are continuing to be strengthened by job growth, increasing tenant demand, robust user demand and growing interest in creative-office space.
Hill is a first vice president at CBRE.
