Where’s Construction Activity Booming?

How does California stack up against other West Coast markets in terms of office construction activity? JLL examined the state of affairs, comparing YTD deliveries, projects under construction and deliveries on the chart below. Connect Media asked CRE leaders at JLL to share deeper insights behind the numbers in four key markets.

Los Angeles: Carl Muhlstein

The Los Angeles office market focus is locating appropriate creative adaptive reuse candidates as inventory dwindles and reconstruction costs spike. Landlords spend significant renovation dollars on existing buildings to compete. Almost 9M SF are delivering, under construction or advanced planning between now and 2019 spanning the greater downtown area to the beach, Santa Monica to El Segundo. A majority comes online in 2017 and 2018. Rental rate growth has subsided though annual bumps increase while free rent and tenant improvement allowances are narrowing.

 Orange County: Jeff Ingham

Office rents in Orange County are projected to increase in 2017 with the addition of new construction to the market. Reported rental rates from a research perspective are set by the asking rate of available space. Since there will be more space that is either new or where landlords have completed a full renovation of existing buildings, there will be more space being marketed at higher rents. Additionally, it is anticipated that the buildings coming onto the market will be at higher pricing, due to increased land price and construction pricing, as well as developers increasing the quality of construction as compared to the last cycle. The only saving grace to this is that developers, and hence tenants, are benefiting from the current low interest rate environment.

San Diego: Tim Olson

San Diego’s new office construction has been measured compared to other West Coast markets resulting in a steady incline of rental rates and decreasing vacancy rates throughout the city. With a prolonged recovery this cycle, developers have remained disciplined and the market has delivered more re-developed projects – flex/R&D to office and office to biotech – than new speculative construction. The spec construction has been isolated to the top two office markets of UTC and Del Mar Heights, which have both achieved rental rates beyond the last peak.

 San Francisco: Jack Nelson

Among major Bay Area real estate markets, San Francisco is experiencing the highest level of new office construction, but even this is constrained by Prop M, the city’s longtime growth ordinance. With the third quarter approval of Oceanwide Center, a 1-million-square-foot, mixed-use development at 1st and Mission, the city’s Prop M allocation “bank” hit its lowest level since 1986. The city’s annual limitation on office space has only 440,000 square feet available for allocation with more than 1.1 million square feet of pending projects.

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