The Orange County office market remains stable, supported by strong fundamentals and optimism regarding the local and national economies
The Orange County office market will see rents continue to increase, but landlord concessions are beginning to reappear as investors and developers push to lease up new projects. We saw a slight uptick in vacancy, but this is primarily due to the delivery of new product in the market including 400 Spectrum Center, Five Points Gateway and The Boardwalk in Irvine. The most notable and anticipated deliveries of 2018 is “Flight” at Tustin Legacy. The 38.7 acre mixed-use project will provide 870,000 square feet of state-of-the-art creative office space and 2.5 miles of recreational trails, supported by premium on-site amenities.
Additionally, tenants that relocated from Class B to Class A buildings from 2012 to 2014 are experiencing sticker shock as they evaluate renewal and relocation alternatives amidst the Orange County office market and its rapidly rising lease rates.
To extract maximum operational value from rising occupancy costs, business owners are taking an even closer look at how building quality, workspace design and access to amenities impact their brand identity and ability to attract and retain top talent.
By now, most business owners and investors have had an opportunity to review and digest the new tax reform. The response from the business world has been exceptionally positive. Major corporations have announced plans for domestic investment, employee bonuses, higher wages and repatriation of overseas profits.
Lower income tax rates for C-corporations and pass-through entities, accelerated depreciation on equipment and qualified capital improvements along with continued deductibility of mortgage interest expense all point to businesses keeping more of their profits, resulting in their ability to invest in further growth. To everyone’s relief was the fact that IRC 1031 exchange rules were left untouched.
However, there are concerns that a boost in economic growth could trigger a rise in inflation, which has remained stubbornly low throughout the economic recovery that is now in its ninth year. If inflation does spike, the yield on the 10-Year US Treasury, the benchmark for setting commercial property mortgage interest rates, would likely move up, as well. In fact, that yield has already risen by more than 50 basis points in the past few months.
While ground-up developers, value-add investors and existing landlords are looking to attract tenants with new amenities and innovative workspace designs to justify higher rents, an increasing number of business owners are angling to own their own facilities in order to help stabilize long-term occupancy costs.
However, available inventory of suitable owner/user properties in the Orange County office market is running well short of demand and that has driven sales prices to all-time highs.