Trends And Topics In The Local Market
April 17, 2014
Though Bayshore Partners serves clients in real estate markets coast to coast, I feel very fortunate to have our headquarters in Orange County for many reasons. In keeping up with forecasts and trends, I’m finding that Orange County markets are already experiencing the changes that will affect corporate real estate across the country in the coming months.
One of the long term effects of the recent recession has been to make businesses more aware of the bottom line impact of their commercial real estate decisions. As the market continues to strengthen, companies are seeking to align cost containment with the necessary functionality for optimum business performance. While rental rates are still relatively flat, job growth is strengthening and there has been little new construction over the past several years. This will lead to inevitable increases in rents.
Orange County is a perfect reflection of that trend. The county has experienced a steady growth rate of approximately 2% in employment over the past several years. As a result, the vacancy rate has declined, costs have risen and tenants are winning fewer concessions at the bargaining table. Part of the scenario driving rent increases relates to the essential halt to new construction when the Great Recession struck in 2008. Between 2009 and 2012, only 1.3 million square feet of office space was completed, far below the levels over the previous 25 years.
As the level of new construction is starting to pick up, developers are proceeding with caution. Today, most of the new projects are pre-leased before the project breaks ground. This reduces the risk for the developer and avoids competition with existing inventory.
Rental rates for Class A office space are inching up, increasing to an average of $2.25 per square foot as tenants take advantage of historically low rates that allow them to occupy quality space. Class B rates are also inching up, averaging $1.85 per square foot by fourth quarter 2013.
Orange County offers a lifestyle and climate that are hard to beat anywhere else in the state, or even the country. There is continued strong growth in the financial and construction, adding 7,000 and 6,900 jobs respectively last year.
With continued economic improvement, increasing rents will lure developers back into the construction market. Historically, Orange County has been one of the most lucrative markets for investors, and promises to be so again in the future. Other real estate markets, particularly those with concentrations of high employment growth industries, are experiencing the same upward pressure on rents as occupancy rates improve.
To find out more about the changes on the horizon that will affect your commercial real estate plans, please contact me.
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