The third quarter marked the second consecutive quarter of Orange County tech funding topping $100 million and guaranteed a fourth straight year surpassing $.5 billion, according to a recent report from JLL, which shows the value of this sector to the region.
As SoCal Real Estate reported in September,a report distributed by a representative of JLL shows that while all tech startups are spread throughout Orange County, most of these newer companies in the region call either the Airport Area or Irvine Spectrum home. The report, based on information from JLL Research and Crunchbase, also found that Airport Area startups had raised $195.2 million compared to the $152.2 million raised by their Irvine Spectrum counterparts and that the two submarkets accounted for 91 percent of startup funding in Orange County.
Also, according to CBRE’s just-released annual Tech 30 report, interest in this sector has boosted office asking rents in South Orange County, making it the third-biggest jump among the top tech submarkets.
We spoke with Scott Wetzel, VP of JLL in the firm’s Irvine, California, office, about how the Orange County office market is being affected by tech investment, why Orange County is attractive to these investors, and where he sees this heading.
SoCal Real Estate: What is your view on how tech investment is impacting the OC office market?
Wetzel: Tech and med-tech are driving forces in the OC office market, responsible for 40 percent of the largest transactions year-to-date. Outside of local, state, and federal government, no other sector is having such a strong impact. Of these tech companies, 50 percent are headquartered here in Orange County: Anduril (VR defense technology — Irvine), Acorns (fintech — Irvine), Covidien (medtech — Ireland) and WeWork (proptech — New York). The existing labor pool and entrepreneurial spirit of Orange County has a long history of attracting VC and PE money. Information technology, software, and cybersecurity firms have led investment activity so far this year, attracting 74 percent of total funding. In turn, these growing companies are having a positive impact on the OC office market as they look to hire new talent. Conversely, landlords looking to win over these types of tenants are improving their properties, collectively raising the quality of office product in the area, while also increasing property values.
Your report shows that tech funding in this market has varied quite a bit since 2015. To what do you attribute this inconsistency?
The four-year trailing average for annual tech funding is $658 million. YTD 2018 is currently $705 million, so the year-to-year discrepancies are actually nominal, but the variance can almost solely be identified by a handful of large transactions that cause some years to spike while other years regress to the mean. Tech investors have been active since the Great Recession, forcing them to look outside Silicon Valley or Silicon Alley, and in doing so they’ve turned to secondary and tertiary markets. Acting as an L.A. suburb, Orange County has reaped the benefit of that attention in recent years because savvy investors are attracted to a secondary market like OC that gets a little less attention than gateway markets like San Francisco and Los Angeles.
Where do you see the market heading over the next several years?
Over the next several months, I expect the market to continue to tighten. Irvine Company’s portfolio is over 95 percent leased, and new developments like The Boardwalk and The Quad have been gaining momentum on the lease front. We can expect to see rental rates increase over the next 12 to 18 months, but beyond that, no one has a clue what will happen. That isn’t to say something scary is hanging in the balance like it was in 2008, but some sort of market correction is inevitable, and that will lead to decreased spending, tech investment, hiring, etc.
What factors could lead to further growth of tech investment in this market, and what factors could inhibit it?
The number-one driver that could spark tech investment in Orange County would the relocation or expansion from a tech giant into this market. Big players have a relatively small footprint (150,000 square feet) in this market compared to others where they have 1 million square feet or more. The inhibiting factor is our existing labor pool. At 3.1 percent unemployment, we are beyond full employment, making it difficult for scaling companies to hire without stealing talent from their competition. Tech investment and corporate growth will continue to be restrained by this type of labor-pool shortage, which should be recognized as a challenge affecting most, if not all, significant tech markets. Barring a large tech company replanting its flag in Orange County and bringing an exodus of talent with it, OC tech growth and investment will continue to increase, but at a decreasing speed.