Low-rise office sector activity continued to pick up during the first quarter in four of the five Orange County submarkets, though Fisker Automotive vacated 156,000 square feet of low-rise office space at 5515 E. La Palma Ave. in Anaheim, basically neutralizing the statistics.
Low-rise office buildings account for approximately 55%, or nearly 55.2 million square feet, of the county’s office space. There are about 1,541 low-rise office buildings in Orange County, compared to 124 high-rise and 173 midrise office buildings.
Trends
Current trends in low-rise offices include creative-office building conversions, the beginning of the reversal of “flight to quality,” and user sales and developer acquisitions of mostly multifamily properties.
Creative-office conversions are an option for owners when buildings are in need of renovation and/or second-generation improvements are not reusable.
WorkScapes, a six-building office project in Newport Beach, was recently purchased by Buchanan Street Partners. It has five creative-office building conversions, all 100% leased. Buchanan Street Partners plans to convert the last remaining building, which is in need of renovation, to complete what will be the first true creative-office campus in Orange County. WorkScapes has been used as a case study for low-rise creative-office conversions since it raised eyebrows with local area developers, including Newport Beach-based Irvine Company, with the rental premiums of about 30% that it has achieved.
“Real-time” activity in low-rise projects has been very strong since early April. Absorption is expected to be very strong in coming quarters.
Many low-rise tenants that moved to high- and midrise buildings because of attractive rental rates during the economic downturn are starting to get hit with increasing rates. Those same tenants are expected to move back to more affordable low-rise properties.
User sale activity is the strongest it’s been in years. Many active buyers are chasing a limited supply of low-rise buildings on the market, and significant price appreciation is improving on a quarterly basis in prime locations.
Developers, Outlook
Multifamily developers have a huge appetite for land, and in some cases, older and functionally obsolete buildings will continue to be torn down to make way for new projects.
The outlook for the low-rise office market is positive, and market fundamentals should continue to benefit from increasing job growth, growing tenant demand, and increasing interest in creative-office space.
Dillon is a first vice president at CBRE.
