Obamacare was a boon to the health of Central Orange County’s office market in 2014.
More than 1 million square feet of new healthcare-related leases were signed in Anaheim, Orange, Garden Grove, and Santa Ana over the past year, according to estimates by the Irvine office of brokerage JLL.
The burst of activity helped push down vacancy rates in the Central OC office market—which consists of about 17 million square feet—to about 15% at the end of 2014, according to a sampling of area brokerage data.
That is still among the highest for OC’s office markets.
The area around John Wayne Airport has vacancy rates closer to 11%, while South OC’s office market is under 10%.
The new healthcare tenants in Central OC nonetheless represent a step in the right direction for a market still finding its feet after the subprime mortgage industry’s implosion during the Great Recession.
“It’s a big trend I’ve seen,” said Curtis Ellmore, a senior vice president with JLL. “Central Orange County has become the home of healthcare.”
Affiliates, Agencies
Affiliates of large hospital operators, including one of St. Joseph Health System, inked big deals in the area last year, as did growing private companies such as Alignment Healthcare LLC.
State and county agencies that deal directly with healthcare- and insurance-related matters also snapped up multiple floors of space across the area, partly to handle the effects of Obamacare.
You can thank the phasing in of most aspects of the Patient Protection and Affordable Care Act in early 2014 for just about all of the recent boost in activity, market watchers said.
“It’s all related to the healthcare act,” said Garth Hogan, executive managing director of Global Healthcare Services for brokerage Newmark Grubb Knight Frank.
“Until it passed, a lot of companies couldn’t do anything” in terms of new leases, said Hogan, who works out of the company’s Newport Beach office. “There was a lot of pent-up demand.”
Longer-Term Leases
Companies are now comfortable signing longer-term deals.
“We’re seeing some 15- and 20-year commitments,” said Hogan, whose group has observed a “surge” in lease activity over the past year.
“It’s a nationwide trend, too.”
Healthcare tenants have gravitated toward offices in Anaheim, Orange, Garden Grove and Santa Ana for many of the same reasons the subprime industry did several years ago.
There are large blocks of open space available in those areas—good for back-office and call center operations—along with the proximity to employment bases in North OC and the Inland Empire, plus generally cheaper rents than the Airport Area.
Central OC “makes sense for a lot of these companies,” said Ellmore, noting that several of the new leases involve companies that were previously closer to John Wayne Airport.
Recent Deals
Central OC nabbed the largest new office lease of the year in 2014, thanks to a healthcare company.
St. Joseph Heritage Healthcare, a growing integrated-care medical group with more than 300 physicians and medical providers, signed a 191,000-square-foot lease to occupy all of the office space at 200 Center St., one of the largest buildings in downtown Anaheim.
The eight-story building, near Anaheim’s City Hall, previously served as the local operations hub for AT&T Inc.
St. Joseph Heritage is affiliated with Orange-based hospital operator St. Joseph Health System, one of several large regional healthcare operators that have been expanding their operations here through leases, purchases and new developments—in part to compete with powerhouses such as Kaiser Permanente.
Other recent deals in the area include a new lease for Alignment Healthcare at the 1100 Town & Country Road office in Orange—the former home of subprime lender Ameriquest.
Alignment leased nearly 50,000 square feet at the building and is moving its headquarters there, according to Jonti Bacharach, vice president for the Newport Beach office of tenant brokerage Cresa Orange County.
The new deal about doubles Alignment’s space compared with its prior address in Irvine, according to Bacharach, who worked on the lease with colleagues Pat Murphy and Wayne Lamb.
Alignment works with hospitals, health plans, and primary-care doctors’ groups to streamline medical care for chronically ill seniors, among other services.
The company received $125 million in funding last April from Greenwich, Conn.-based General Atlantic LLC, a global investment firm with more than $17 billion under management.
In September, the company paid an undisclosed amount for Cerritos-based Citizens Choice Health Plan, a Medicare Advantage health plan with more than 1 million members spread across seven counties in California.
Bacharach said he had another healthcare-related tenant nearing a deal in the 50,000-square-foot range, also in Central OC.
“It’s definitely a trend,” he said. “A lot of these companies are growing fast” since the healthcare act was phased in.
How much more office space might be snapped up in Central OC in 2015 remains to be seen.
Big blocks of space in the region “are slowly going away,” leaving fewer options for healthcare and insurance tenants looking to grow or consolidate operations, according to JLL’s Ellmore.
Newmark Grubb’s Hogan said he expects growth this year for deals in the range of 20,000 square feet to 30,000 square feet, with many for clinics and urgent care services that previously operated out of hospitals.
Locations close to retail centers, in particular, could see a surge in activity, he said.
