Top 5 California Markets for Office Deliveries
- Mar 06, 2020
California’s office market, along with its strong multifamily sector, had to adjust to the strong demand for space that the state’s prolonged economic growth has brought on. Following three record years for development and leasing activity, the office market is believed to have reached a peak. According to Yardi Matrix data, more than 16 million square feet of office space was delivered in 2019. Although construction activity remains strong, a slowdown in demographic growth, paired with an outbound migration of a number of companies is expected to impact demand if the trend continues moving forward.
The list below shows the top five California markets for office deliveries in 2019 using Yardi Matrix data. The ranking was based on inventory growth rate, which is the reason why smaller markets with an emerging office sector such as the Inland Empire are part of the list.
5. Central Coast
Office market fundamentals remained healthy in California’s Central Coast throughout 2019 as two of its counties—Santa Barbara and San Louis Obispo—were listed among the top 10 best markets for job seekers, according to career resource website Zippia. The market has an office inventory of approximately 13 million square feet, with deliveries in the last year reaching 143,500 square feet, 1.1 percent of total stock. Situated between California’s two-star cities, Los Angeles and San Francisco, Central Coast boasts a large pool of educated people, more than one-third of them having a bachelor’s degree. The area’s population growth, however, has been decreasing for several years in a row. The outbound domestic net migration was approximately 7,000 people in 2018, mostly due to young talent leaving for other parts of California or Arizona and Texas.
San Louis Obispo has been known as the most active submarket for deliveries, but last year Santa Maria took its spot with 98,000 square feet in new supply. The only asset coming online was CoastHills Credit Union’s building at 1075 E. Betteravia Road, which features a net ground lease with NKT Commercial.
4. Inland Empire
It may be surprising to see the Inland Empire among the top 5 California markets for office deliveries by inventory growth, but demand for office space has been slowly rising in this logistics haven due to lower rental rates and proximity to California’s bigger markets. New office projects were limited in 2019, with 386,000 square feet in new deliveries, which account for nearly 1.2 percent of the market’s total office inventory. Demand for office space has been bolstered by a growing education and health-care services sector, which expanded significantly, although the professional and business services and financial sectors have also been expanding in 2019.
All four projects coming online last year were servicing the educational and health-care services sector: Riverside Medical–Valley Center, Prime Healthcare Headquarters, San Antonio Regional Hospital on San Bernardino Road and Loma Linda University Shared Services Building. Another upcoming project, a 16-story medical center, is expected to be the tallest building in San Bernardino County. The Loma Linda University Shared Services Building in the San Bernardino submarket is the largest among all projects, encompassing 153,000 square feet and 194 parking spaces.
3. Orange County
Compared to 2018, when less than 500,000 square feet was delivered, 2019 represented a top year for office deliveries in Orange County. Roughly 1.7 million square feet came online, which accounted for 1.4 percent of the metro’s office inventory. Demand for modern space continued to rise compared to previous years, bolstered by smaller companies leaving Los Angeles due to high costs. As a result, developers have been focusing on adding Class A space to submarkets such as Irvine Spectrum, Laguna Woods and South Coast Metro. Improving infrastructure has been another main focus in Orange County, with Orange County’s California Department of Transportation getting ready to start working on a $180 million bridge on 91 Freeway Lane in order to ease the connection to the Inland Empire.
The largest office project delivered last year was Irvine Co.’s 660,000-square-foot Discovery Park campus in the Irvine Spectrum submarket. In the summer, the business park added a number of new tenants including Kajabi, Hyperice, WeWork and Pacific Rim Capital. The campus features a variety of amenities such as onsite dining, gourmet coffee bar, fitness centers, several common spaces with TVs and fire pits as well as event and conference facilities.
2. Bay Area
As expected, the Bay Area is very high on the list for office deliveries after occupying the top position for office transactions last year as well. The market had slightly more than 4.7 million square feet delivered in 2019 but compared to its large inventory, that represented only 1.8 percent of office stock. The metro continued to experience record growth in 2019 due to its strong economy and availability of high-paying jobs although for three years in a row the outbound domestic migration has been deepening as many smaller firms are being priced out. Companies that cannot afford the high rental rates and housing prices in the Bay have been choosing states such as Texas, Washington and Oregon.
The Bay Area had two record years for office deliveries (2018 and 2019) and most of the space has been concentrated in submarkets with high rental rates, such as Sunnyvale-West, San Jose, Palo Alto and Mountain View. The largest office project delivered last year was Jay Paul Co.’s Moffett Towers II Buildings 3, 4 and 5, which totaled 1.1 million square feet. Located in the Sunnyvale North submarket at the former Lockheed Martin site, the project is LEED Platinum certified and features many outdoor amenities.
1. San Francisco
Despite a slowdown in population growth triggered by the metro’s record-high cost of living, San Francisco remains one of the nation’s most attractive cities for both talent and companies. Office-using jobs accounted for more than one-third of the total employment pool in the metro at the end of 2019. Visa signed one of the largest office expansions last year, leasing a 13-story building at the Mission Rock development in SOMA. The building is expected to host the financial company’s new global headquarters in 2024.
Office developers have been trying to balance out demand, with deliveries in 2019 being close to 4.8 million square feet, which accounts for 2.7 percent of total office inventory. Two projects were larger than 700,000 square feet: MetLife Real Estate Investment’s Park Tower at Transbay in the San Francisco-South Financial submarket (766,000 square feet) and Kilroy Realty’s The Exchange on 16th in the San Francisco-Potrero Hill submarket (750,000 square feet). At the end of last year, Facebook preleased the entire 45-story Park Tower at Transbay, closing the largest single lease transaction in the city’s history.
Yardi Matrix covers office properties of 50,000+ square feet in markets across the United States. This ranking reflects developments underway within that sample group.