Irvine Co. reported a surge in office leasing last year as the demand gap between renovated spaces and older properties widens, with some employers opting for upgraded, modern properties to tempt remote workers back to the office.
Irvine Company Office Properties, one of California's largest office landlords, said leasing climbed 17% in 2024 from the year prior to 11.5 million square feet, thanks in part to investments made to upgrade the company's properties in Orange County, Los Angeles, San Diego, Silicon Valley, Chicago and New York City. The privately held company's portfolio —spanning 53 million square feet, primarily in California — is now 90% leased, outperforming the national vacancy rate of 14%.
Irvine Co. has spent about $538 million upgrading its portfolio in the past year, contributing to a 66% renewal rate among tenants, according to the firm.
At the firm's 200 Park Ave. building in New York City, a $200 million renovation helped the firm sign more than 400,000 square feet of leases with tenants like law firm Winston & Strawn and CBRE. Closer to home, the firm signed on three new tenants for its building at 2121 Avenue of the Stars in Los Angeles after renovating the 769,066-square foot tower.
The deals "underscore both the ongoing flight to quality and renewed optimism in the office market," said President Roger DeWames.
Owners of higher-end offices are benefitting as vacancy rates for such spaces average 13% compared to roughly 19% for the rest of the market, according to CBRE data. They can also command about 50% higher rents than the rest of the market, up from 40% three years ago.
The flight to quality is driving deals across the country, from a global law firm's decision to double its space in Washington, D.C., in a relocation to a trophy building, to a noticeable uptick in New York City tenants moving from outdated offices to modern buildings.
Giving tenants what they need
For Irvine Co., the three industries leading the leasing rebound are legal services, financial services and technology.
Law firm leasing demand returned to pre-pandemic levels in 2023 and keeps growing, per Irvine Co., with the firm signing 522,000 square feet to law firms in Chicago alone last year.
The firm's Orange County properties are also seeing strong leasing from a broad range of tenants including financial institutions like JPMorgan Chase, which signed a 173,000-square-foot lease at the Jamboree Center in Irvine; and Bank of America, with 106,000 square feet leased at 520 Newport Center Drive in Newport Beach.
Tenants are also opting for flexible leases in the wake of the pandemic, with companies signing on for nearly 2 million square feet of space in Irvine Co.'s Flex+ concept that offers private, move-in ready suites with shorter or more loose lease terms. Companies are interested in the ability to quickly expand their real estate while allowing for future changes as they bring workers back to the office, such as Amazon. The tech giant is expanding its partnership with WeWork across the country.
Despite positive momentum boosted by demand for newer and flexible spaces, the office market remains in a deep state of recovery. Tenants collectively handed back upward of 65 million square feet in the U.S. last year, boosting the total to more than 180 million square feet of move-outs since the start of 2020, according to CoStar data.
Leases that are being signed these days have also shrunk considerably, averaging about 20% smaller than their pre-pandemic averages.