The Orange County office market continues to show resiliency even as economic uncertainty remains.
Overall occupancy levels improved in the third quarter as robust tenant demand resulted in substantial positive absorption in the third quarter, and the market outlook remains optimistic.
More than 462,000 square feet of positive absorption was recorded in the third quarter. That was less than the activity levels seen in the previous quarter but also brought net absorption year-to-date total to nearly 1.4 million square feet.
The strong activity hasn’t kept the average asking lease rate for office space from dropping. The average rental rate shed an additional cent to $1.91 in the third quarter.
Lease Rates
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 decline has slowed significantly since the fourth quarter of 2010, however. Though the last two years of positive net absorption has not stopped the decline in lease rates entirely, it has slowed the velocity of the decline considerably.
Asking rates in class A properties decreased by three cents to $2.06 per square foot, while the average asking lease rate for class B space remained unchanged at $1.77 per square foot. In contrast, class C properties recorded an increase of 6 cents to close the quarter at an average asking rate of $1.62 per square foot.
The airport area continues to have the highest asking rent, despite a decline this quarter to $1.98 per square foot. South OC also carries an asking rent above the County average at $1.93.
North and West OC fall into nearly the same range, moving up this quarter to $1.86 and $1.88, respectively. Central Orange County had the lowest asking rate at $1.75 per square foot.
The total vacancy rate for OC dropped to 13.7%, down from 14.2% last quarter. By area, South OC had the strongest decline this quarter compared to submarkets in the rest of the county, falling to 11.3% from 12.2%. Central OC also saw a significant decrease with a vacancy rate of 16%. West OC was the only submarket to post an increase, moving slightly upward to 16.5% from 15% in the second quarter.
Vacancies in class A properties decreased to 15.3% from 16.2%, while the vacancy level of class B climbed to 12.3%. class C properties also experienced a decline in vacancy to stand at 13.3% in the third quarter.
The office market absorbed an additional 462,516 square feet in the third quarter, bringing the 2012 year-to-date total to 1,367,121 square feet. That marked the 10th consecutive quarter of positive net absorption since the second quarter of 2010.
Airport Activity
Absorption in the airport area accounted for the most activity in the third quarter with approximately 226,942 square feet of space. South OC also performed well, absorbing 191,147 square feet, as did Central OC, which absorbed 109,446 square feet this quarter.
North OC experienced relatively flat absorption, although positive with a total of 8,489 square feet. Some negative absorption did occur in the West OC submarket which totaled 73,508 square feet.
The majority of the demand occurred in class A properties resulting in 436,238 square feet of absorption—evidence that tenants are continuing the make a flight to quality and are taking advantage of record-low lease rates. Some negative movement was seen in class B properties, which had 10,480 square feet of negative net absorption. Class C saw 37,118 square feet of positive net absorption.
There are currently three build-to-suit projects under construction in OC totaling 988,386 square feet. The most recent property to break ground will serve as headquarters for Pacific Dental Services. This 139,386-square-foot building, located in Irvine, was previously an industrial building which is being refurbished and is expected to complete by early next year.
Hyundai Motor America is building a new 469,000-square-foot facility in Fountain Valley, while construction continues on Pimco’s new 380,000-square-foot headquarters in Newport Beach.
There is no construction of speculative office product under way.
Analysis by CBRE Group Inc.
