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June 05, 2016

Metal skyline: Office construction is on the rise again in O.C.

The Orange County Register

Jeff Collins

A bulldozer molds a building pad on a dirt lot in Newport Beach. A welder perched eight stories up assembles a high rise's steel frame at the Irvine Spectrum. A giant mechanical arm pumps concrete from a mixer truck high into into a new building's third floor off Sand Canyon Avenue.

Building cranes are cropping up throughout Orange County.

Office construction in the county is on the rise again, hitting a high not seen for nearly a decade.

Almost 2.8 million square feet of office space was under construction during the first quarter of the year, commercial brokerage CBRE reported. That's up a whopping 461 percent from the winter quarter of 2015 and the most for any quarter since the summer of 2007.

It's a dramatic comeback. From October 2009 through March 2010, no new offices were built anywhere in Orange County.

"This is the most office development we've seen since the last go-round, definitely," said Kurt Strasmann, a senior managing director for CBRE's Orange County operation.

In addition to "a lot of speculative office construction," developers are remodeling older buildings, replacing traditional offices with sleek, modern designs and outdoor work and meeting spaces to enhance collaboration. Wellness and fitness centers, restaurants and shopping are making it easier for younger employees to spend more time at work.

Job gains boost demand

The reason for all this activity is simple, Strasmann said. "The market fundamentals have been really strong," he said.

With steady job growth and a more diversified economy, demand for new office space has gone through the roof. Businesses have filled 10.2 million square feet of vacant office space here since early 2010.

As a result, office vacancies fell to 9.7 percent in the first quarter this year, down from 18 percent six years ago.

And monthly rent shot back up, rising steadily over three consecutive years. First-quarter asking rent averaged $2.46 per square foot a month, up 55 cents from three years ago.

That's equivalent to paying $27,500 more each month for a 50,000-square-foot office.

Orange County, Strasmann said, is "certainly one of the strongest markets in the nation."

Jerry Holdner, the director of research for Kidder Mathews' Western region, said there are at least 10 office-construction projects underway in Orange County, ranging from 5,000 to over 1 million square feet.

"When the vacancy rate gets down to 12 percent in Orange County, that's when construction begins," said Holdner. "Lease rates are going up, so it pencils. So construction begins. It actually began 18 months ago."

High rent and housing costs elsewhere also boosted demand for Orange County workspaces, said Jared Dienstag, a commercial real estate analyst with JLL.

"Orange County is not looked at as a cheap place to live, but compared to Silicon Valley, the Bay Area and even West L.A., Orange County is more affordable," Dienstag said. "Companies that normally would be looking up north are starting to look down here."

For example, Silicon Valley's average lease rate for office space was $4.53 per square foot in the first quarter, compared with Orange County's $2.46, according to CBRE. In the San Francisco Peninsula, average lease rates were $5.54.

Ahead of everyone

Orange County's biggest landlord - the Irvine Co. - saw an office shortage coming more than three years ago.

The firm broke ground as far back as 2011 on the new 20-story Pimco headquarters at Fashion Island. In late 2012, work began a couple of blocks away on its first speculative project, the 20-story 520 Newport Center Drive.

In all, the Irvine Co. has been adding 1.7 million square feet to its office inventory here.

"The Irvine Co. was way ahead of everyone with that Fashion Island building," said Kidder Mathews' Holdner. "They actually timed it pretty well."

How'd it do it?

Doug Holte, president of the firm's office-properties division, said that although countywide office vacancy rates were around 14 percent-15 percent at the time, the company's vacancy was far lower - less than 5 percent. Today, it's 3 percent.

"We were the first to recover occupancy," Holte said. "That gave us the confidence to come to the market."

Remodeling comes first

In addition to new construction, developers have been gutting existing offices and producing sleek new workspaces.

"There's been more renovation work in my mind than new construction," said Jeff Ingham, senior managing director of JLL's Orange County office.

Newport Beach-based Bixby Land Co. has embarked on 27 office remodeling jobs from San Diego to San Francisco in recent years.

"The theme of all these are pretty similar," said Bill Halford, Bixby president and CEO. "Taking a building that's fully vacant or mostly vacant and make it something more architecturally interesting."

Whether it's new space or remodeled space, however, modern, creative designs predominate.

Most users no longer want "a commodity office," Halford said. "They want something that's aesthetically an interesting space" to help attract and retain top employees.

"The companies that are growing today aren't looking for traditional office space," Halford said. "They're looking for talent to drive their business, and one way to (attract that talent) is to provide a more interesting office space."

Office designs increasingly are inspired by the Google and Apple workspaces in Silicon Valley.

They include things like high ceilings, large windows, lots of natural light and plenty of nearby amenities for eating, socializing and fitness.

There are outdoor meeting and work areas, Wi-Fi access everywhere, fire pits, bocce ball courts, restaurants and shopping.

Tenants are "searching for unique space that offers the ability to brand or differentiate their organization," said Tom Bak of Trammel Crow's Newport Beach office. "An organization's office space helps express its culture."

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