Slowdown in Capital Markets, WeWork Produce Major Impacts in Orange County

Connect Orange County is just around the corner. The annual gathering is set for August 22 at The Resort at Pelican Hill in Newport Coast. Information about the event and registration details can be found on this link.

Connect Media asked NKF’s Jay Nugent to share a few insights about the trends driving the market, strategies at play, as well as what deals are getting completed at this point in the cycle. Check out his responses in our latest 3 CRE Q&A.

Q: What are some of the overarching trends you are seeing in the market?
A: We are seeing a slowdown in capital markets activity in Orange County. Sales volume is down over 50% from this time last year, as capital is shying away from the bigger deals because they are not providing the returns these capital funds – which are mostly value add funds – require.

WeWork is having a major impact – most of it is positive right now as it is making up the vast majority of the Class A absorption. If you own a Class A building and have not done a WeWork deal yet, you are either talking to them or they are trying to talk to you.

The Airport and Spectrum submarkets continue to perform well, and new product in those markets is being leased. Most of the new deals are larger in size and going to buildings that are offering large TIs. However, we are seeing a slowdown in demand in the surrounding markets of central and south county – south of the Spectrum. Commodity product is static – lower-priced options are leasing.

Due to the higher cost of TIs, landlords are requiring longer-term deals which is tough on small leases, therefore making renewals more common than in the past or further encouraging co-working space as a more attractive option. We are finding that tenants are only moving when a renewal is not an option, or if they are looking for a cultural change.

Q: What are some of the strategies you suggest, given the current conditions?
A: The strategies we are seeing include more flexibility with length of term, and offering spec suites with shared amenities such as conference rooms and kitchens in order to keep TI costs down. Because rents have stabilized, trying to push rents without spending real money is not working – owners are having to amenitize their projects in order to justify higher lease rates.

Q: Can you cite a few examples of deals that are getting done in Orange County that reflect the market trends and conditions?
A: Landlords that are willing to offer big TIs are attracting tenants and subsequently, deals are getting done. Larger blocks of space are seeing action, and there is also a demand for space with above-standard parking. For example, Happy Money took 72,000 square feet of space at FLIGHT at Tustin Legacy and received 6:1 parking on an 8-year lease.

For comments, questions or concerns, please contact Dennis Kaiser