The Orange County office market continued to make steady progress during the fourth quarter, despite some lingering headwinds.
Optimism and confidence in the market was strong as investors competed for the limited supply of available office space.
The market grew considerably over the past year. It helped that it’s one of the most desirable locations in the U.S. and has higher employment and lower vacancy levels than national averages, boosted by the healthcare and technology sectors here. The growing popularity of creative offices has also strengthened the market, as landlords willing to offer creative alternatives are drawing more tenants to the county.
Hurdles remain, and certain submarkets lag behind. But the majority of the county continued its positive momentum.
The office market recorded negative absorption for the first time in 14 quarters, ending the fourth quarter with negative 113,450 square feet.
That resulted from large move-outs and downsizings of tenants like Conexant Systems Inc., which downsized at 4000 MacArthur, and MSC Software Corp., whose lease expired at 2 MacArthur Place in Santa Ana.
The vacancy rate rose from 12.2% in the third quarter to 12.4%, though it was still down from the 13.1% recorded a year earlier.
The negative absorption remained below early estimates by CBRE Econometric Advisors, which forecasted negative absorption for the county to total about 744,000 square feet at the end of 2013.
The annual net absorption remained positive despite the negative absorption in the fourth quarter, ending the year with 895,014 square feet.
The average asking lease rate in the fourth quarter increased 2 cents from $1.93 per square foot in the third quarter. The increase, although minimal, was the largest since the third quarter of 2007. Each successive quarter in 2013 posted incremental increases, a steady growth that’s a positive sign of improving fundamentals and market recovery.
Average asking lease rates have remained relatively flat for nearly three years. The countywide average, despite pockets of rising rental rate growth, remained at less than $2 per square foot.
Asking rental rates for many areas and projects increased 5 cents to 10 cents per square foot.
Rental rates and employment are expected to continue their upward trends this year, and absorption numbers should remain steady. Average rents are expected to grow approximately 3% by year-end.
Office employment, which grew by 2.8% over the past 12 months, is forecasted to maintain the steady growth rate throughout 2014, and absorption should be positive.
Analysis provided by CBRE Research
