Orange County lease rates increased six cents in the fourth quarter to $2.88, in large part due to product coming online while not oversaturating the market. Demand remains strong and continues to keep up with supply.
The average asking rental rate rose 2.1% from the third quarter and 10.8% since the start of the year. Large blocks of space were hard to find, so there was high demand from smaller tenants. The workplace has shifted, and space needs have decreased 10% to 15%.
Rent increases are a result of new and renovated class A and B product coming to market. Cash flow buyers/owners are currently focused on high occupancy levels, offering lower asking rates with little to no free rent. Investors, looking to sell in three to five years, are increasing asking rates and offering larger amounts of free rent.
North and West OC asking rates had the highest increases in the quarter as those areas remained the tightest; vacancy rates were 9.2% and 10%, respectively. Space was scarce, and leasing activity remained low. South OC rates increased despite the increasing 1.6% vacancy in Aliso Viejo as completions drove up rents. Rents are projected to continue going up, though at a slower rate.
Net absorption in the quarter was positive 131,398 square feet. It was positive but low in North, West and Central OC, with many small move-ins and move-outs. Large negative absorption in the Greater Airport Area was due to Broadcom vacating 740,000 square feet as it downsized and moved to Five Point Gateway in the Irvine Spectrum in South OC. That left a 740,000-square-foot dent in the airport area and an 80,000-square-foot dent in the countywide market.
Strong leasing activity and move-ins in the airport area have offset Broadcom’s move. There were no other dramatic expansions or contractions in the market in the quarter.
Aliso Viejo took a hit when QLogic moved out 146,000 square feet. The Irvine Spectrum gained the most positive absorption with Broadcom, Lennar Corp. and FivePoint moving into Five Point Gateway. South OC performed well during the quarter due to Vyaire Medical leasing 184,000 square feet and other large tenants moving into the market.
The long-anticipated 1.1-million-square-foot Five Point Gateway was completed with 72% of the office park preleased. Lennar and FivePoint leased 90,000 square feet and 45,000 square feet, respectively. With a large amount of the project preleased, vacancy in Irvine Spectrum increased by 2.3%. The old 2722 Michelson industrial building is being converted to a creative-office/R&D building, delivering 155,000 square feet by the end of this year. The Boardwalk was finished, bringing 537,000 square feet to the airport area. Currently signed are Pathway Capital and Propel Media at 64,000 square feet and 13,000 square feet, respectively. The Boardwalk was 18% preleased at the time of completion.
A total of 2.5 million square feet of office space came online last year in the airport area and South OC. There are 982,000 square feet under construction in the county, 612,000 of that projected to be finished in the airport area and 370,000 in South OC due to the Flight, the Quad and the conversion of 2722 Michelson into creative-office space.
North OC hasn’t had new construction since the first quarter of 2016. Central and West OC last had construction in the third quarter of 2013, but we can expect new projects to pop up in those areas.
—Analysis by CBRE Research
