The Orange County office market continues to see healthy levels of demand.
Occupancy levels continue to improve as strong tenant activity resulted in overall positive absorption in the second quarter. The market outlook for Orange County remains optimistic, prompted by nine quarters of positive absorption of office space and a trend of continuous job growth that is expected to carry through the balance of the year.
More 640,000 square feet of positive absorption was recorded during the second quarter. That was more than double the amount of absorbed space recorded in the first quarter and brings the year-to-date total to about 892,000 square feet of positive net absorption.
Tenant activity in the second quarter was concentrated in the Greater Airport Area submarket, which generated more than 507,000 square feet of positive net absorption. The bulk of remaining absorption was generated in the South Orange County submarket, which ended the second quarter with nearly 138,000 square feet removed from the market.
A minimal amount of new construction of speculative office space is planned for the near future. Newport Beach-based Irvine Company began construction in Newport Center in the fourth quarter of last year on a 380,000-quare-foot build-to-suit office tower for investment manager Pacific Investment Management Co. This class A high-rise property is slated for completion in late 2013.
Net Absorption
The Orange County office market absorbed an additional 643,212 square feet in the second quarter, bringing the 2012 year-to-date total to 891,770 square feet in the ninth consecutive quarter of positive net absorption since the second quarter of 2010.
Absorption in the Greater Airport Area accounted for the most activity in the second quarter with about 507,237 square feet of space. South OC also performed well, absorbing 137,445 square feet.
North and West OC posted absorptions of 27,314 and 20,101 square feet, respectively. Negative absorption in the Central OC submarket totaled 48,885 square feet.
The total office vacancy rate for OC dropped to 14.2%, down from 15% last quarter.
The Greater Airport Area had the strongest decline in the second quarter compared to submarkets in the rest of the county, falling to 14.7% from 16%. South OC dropped to 12.2%, down from 12.8% last quarter. Central Orange County was the only submarket to post an increase, moving upward to 16.6% from 16.3% in the first quarter.
Vacancies, Lease Rates
Vacancies in class A properties decreased to 15.8% while the vacancy level of class B dropped to 11.9%.
Class C properties saw the most dramatic decline in vacancy to stand at 13.5%. That was mainly the result of the demolition of a 113,667-square-foot vacant property located in Fountain Valley.
The average asking lease rate for OC office properties continued to slip in the second quarter; it dropped again by 1 cent, to $1.92. Lease rates have been in decline since the peak of the market in the fourth quarter of 2007, when the average asking lease rate stood at $2.78.
The rate of the decline has slowed significantly since the fourth quarter of 2010.
Asking rates in class A properties decreased by a penny to $2.09 per square foot. So did the average asking lease rate for class B properties, which stands at $1.77 per square foot.
Class C properties recorded a decline of 3 cents to close the quarter at an average asking rate of $1.56 per square foot.
Analysis and data by CBRE Group Inc.
