WESTERN SNAPSHOT, MARCH 2007

Orange County Office Market

Boomer

With a substantial amount of pent-up demand and record-high lease rates, the Orange County office market will continue to flourish throughout 2007. Despite abundant concerns surrounding a significant amount of space put back on the market by mortgage firms and other related real estate companies, approximately 5 million square feet of office space is currently under construction in Orange County, with more than half of that space already pre-leased or under development as build-to-suit product.

The 4.9 million square feet of office space under construction at the end of 2006 is a stunning 400-percent increase compared to fourth quarter 2005. The Orange County office market consists of 1,407 buildings totaling 99.6 million square feet of inventory.

The John Wayne Airport submarket boasts the strongest amount of construction due to the labor force and quality of life in this particular area of the county. There is 3.2 million square feet of office space currently under construction in the airport submarket, with average asking rates jumping to $2.90 per square foot per month. Several projects in the John Wayne Airport submarket will help alleviate the demand for large office space. The major projects coming online that are expected to have a significant impact include:

• Hines’ 2211 Michelson project, a 266,103-square-foot office project in Irvine, California, which has the distinction of being the first LEED-CS (Core and Shell) pre-certified, green building to break ground in California

• Park Place, Maguire Properties’ 385,000-square-foot office project comprising one 10-story office tower and six four-story office buildings, located at 3161 Michelson in Irvine

• 18100 Von Karman, The Irvine Company’s 234,000-square-foot project slated for completion in July 2007

• Opus Center III, Opus West Corporation’s 13-story Class A office tower consisting of 314,074 square feet at 2050 Main Street in Irvine

The most active office developers in Orange County include The Irvine Company, Hines, Maguire Properties, Steadfast Companies and Caribou Industries. Additional large-scale office projects currently under development in the market include Caribou’s One Broadway Plaza, a 37-story, 600,988-square-foot office project in Santa Ana, California, which, once completed, will be the tallest office building in Orange County; 20 and 40 Pacifica, a two-building project totaling 616,000 square feet being developed by The Irvine Company; and Steadfast’s 22-story, 530,000-square-foot office tower in Anaheim, California.

Service and technology companies continue to be the most active tenants in the Orange County office sector. Lease rates among these tenants are continuing to rise and currently sit at record-high levels of $2.52 per month per square foot. The office vacancy in fourth quarter 2006 was 7.91 percent, which explains the increase in construction activity throughout the market.

Another Orange County office trend is small owner/users pursuing purchase scenarios instead of leasing. This is due to low interest rates, the strong demand that is driving lease rates to record highs in the market and the continued economic expansion throughout the county. Small businesses desire to control their occupancy costs in the short and long term, resulting in office developers converting previously leased space to for-sale office product. This is evident in Master Development Corporation’s Stadium Collection project in Orange, California; CT Realty’s Brookhollow office condominium project in Santa Ana, California; and The Brookhollow Group’s Coppertree condominium project in Costa Mesa, California. This conversion trend is helping to meet the demand from owner/users looking to own space instead of dealing with the rising lease rates. Of course, this is also reducing the overall inventory of for-lease product, which is further driving the supply of available office space to record lows.

With skyrocketing land prices and a lack of available space for new development throughout Orange County, office developments are now also going vertical to meet the insatiable demand for new space. As this trend continues throughout 2007, investors will continue to look toward the Orange County office sector, as well as the Southern California office market in general, as one of the nation’s top investment opportunities due to the desirable location, historically strong demand and continued infusion of new product.

Michael Boomer is vice president of Voit Commercial Brokerage in Anaheim, California.

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