The vacancy rate for office space in Orange County rose to 12.8% in the second quarter, due to the addition of 1.6 million square feet of completed construction, which entered the market with a vacancy rate of 61%. The vacancy rate rose to 12.4% in the Greater Airport Area, where 60% of the new product was added to the market, but 48% of it was pre-leased. South Orange County, which accounted for 28% of the new completions, experienced a vacancy rate increase to 17.5% from 15.9% in the first quarter. With no new construction completions in the second quarter, North Orange County’s vacancy rate remained at 9.2%.
Net absorption of office space returned to a positive 36,000 square feet in the second quarter, recovering from negative absorption in the first quarter caused by large movements to newly delivered product. Central Orange County led the second-quarter market activity with more than 140,000 square feet of positive net absorption. South Orange County followed with approximately 87,000 square feet of positive absorption, boosted by nearly 160,000 square feet of positive activity in new projects. The Greater Airport Area experienced negative absorption again in the second quarter due to a few software company closeouts, and an additional residual movement of Verizon Wireless from a 65,000 square foot space in the submarket to the company’s new campus in South Orange County.
In response to the oversupply of new construction in the market, owners and developers have reduced asking lease rates, particularly in flex product. As a result, the average asking rent for office space, which includes flex properties, dropped 1 cent in the second quarter, to $2.29 per square foot per month. Asking rents in the Irvine Spectrum, where the majority of new flex product sits, dropped an average of 7.2% in the second quarter, to $2.69, and South Orange County’s average asking rent dropped 5.5%, to $2.40. On the flip side, West Orange County reported an average asking lease rate increase of 5% in the second quarter, and Central Orange County and the Greater Airport Area each reported an increase of 1%.
In response to heavy demand in recent years, construction activity has been rampant, adding more than 9.6 million square feet to the Orange County base from 1999 to date. However, activity has begun tapering as the market moves further into the maturation phase of the real estate cycle. Construction activity dropped to 2.4 million square feet in the second quarter, down from 3.7 million square feet in the first quarter, and several of the projects left in the planning pipeline have been put on hold.
Approximately 1.6 million square feet were completed in the second quarter, and only one new project began construction. Opus West Corp. broke ground on Phase II at the Opus Center Irvine project within the Irvine Concourse development. n
