Vision of Next Generation Office Space Emerges in OC

By Dennis Kaiser

Last week, Connect Orange County brought together more than 500 CRE leaders for an information-packed conference at the Balboa Bay Club in Newport Beach. The investment and development discussion focused on buying, building, leasing and selling CRE in OC’s market. Here’s what we gleaned:

NGKF’s Greg May says the Orange County market experienced 50% less absorption so far this year. But that by no means indicates the market is in dire straits as many developers are moving forward on projects.

Trammell Crow Co.’s (TCC) Tom Bak says the beauty of OC is the eclectic mix of office spaces available for companies to find what fits their need. For many companies, the building or work space has become the embodiment of its brand.

The economic environment in Orange County is helping drive demand. The market is experiencing 3% year-over-year job growth, low unemployment, which is resulting in triple digit rent increases and vacancy rate declines.

It is difficult to find sites in Orange County to develop an office project, says Bak, “since multifamily has taken up all of the land Trammell Crow Co. likes for office.” The company believes it has a winner in The Boardwalk project located in Irvine. He says the 30,000-square-foot floorplates deliver unique flexibility to tenants in Orange County and that promises to be a real differentiator. The TCC team believes creating a work environment that embraces the Southern California outdoor lifestyle is the right combination to allow for “2,000 plus people outside at any given time.”  It requires a shift away from simply providing functional space to the creation of an experience that’s replete with amenities.

Buchanan Street Partners’ Tim Ballard says the market is focused on capital flows. The firm has pursued deals in Texas, for instance, simply because the California market has gotten too pricey. He cited a disposition deal the firm completed this year in the $575 per-square-foot range on an asset that had been acquired in 2007 for $200 psf. In essence, it makes more sense to divest and acquire elsewhere.

Bixby Land Co.’s Bill Halford agrees there’s multiple acquisition opportunities outside of the Golden State, but ultimately believes California is still the market to develop and own CRE because of its back-end liquidity considerations. While it may be more expensive, and low cap rates prevail, there’s always demand. He says, California is the first to recover after a downturn.

Bixby has found success in California with adaptive reuse projects. In 2009, the company redeveloped a pair of buildings in Irvine that prioritizes outdoor spaces. The model led to the creation of similar environments at the next 20 buildings in the Silicon Valley. “Outdoor spaces have become big selling features,” Halford says, especially with the increased mobility of technology.

The biggest damper on Orange County market leasing activity, says Halford, are landlords such as the Irvine Co. that are intensely focused on retaining occupancy levels in their portfolios.

LT Global Investment’s Randy Jefferson says the company’s focus is creating urban space that provides people with a sense of place and community, and cited the Platinum Triangle project in Anaheim as a mini-example of a development that’s creating a Town Center. Jefferson says that “it is expected to become a kernel that begins the development growth cycle.” He believes the scale of the project could actually be larger, and noted that the Angels and the City of Anaheim are in discussions to allow growth to take place.

Irvine Co.’s Dave Moore says a significant change for retail centers is that size is no longer a determining factor in what constitutes an anchor. The drawing power of a retailer is now the critical measure. The company remains bullish on OC’s  retail market, but notes shifts are occurring that must be addressed.

One change is the number of grocery stores a family may frequent. A generation ago, the weekly grocery shopping trip involved just one stop. Today, that number has increased to four.

Another adjustment is contraction within the department store sector. In the case of the Irvine Co., it took back a 140,000-square-foot Macy’s store at Irvine Spectrum Center that wasn’t performing, despite attracting 17 million visitors. Thus, Irvine Co. is creating a collection of roughly 20 smaller stores and a paseo as part of a $150-million renovation.

With the community and economy in Orange County helping shape new development, along with the redevelopment of assets on the rise, the CRE market has room for expansion, creativity, and the ability to design the next generation of OC’s office, multifamily, and retail uses.

For comments, questions or concerns, please contact Dennis Kaiser