Real Estate Watch: South Orange County
Incentives Help South County Office Market Post Uptick
By JOHN DESPER
Landlords were relieved to see the South Orange County office market get back into positive net absorption in the second quarter after a sluggish start to the year.
While the numbers aren’t overwhelming, the 98,708 square feet of positive absorption provides some hope. And tenants with a firm grasp on their space requirements and confidence in their businesses continue to benefit from favorable supply and demand dynamics.
With 18.5 million square feet of office space in 382 buildings, the South County market is second in size to the John Wayne Airport area.
Several factors accounted for the positive absorption in South County.
Landlords are offering incentives to help convince tenants to negotiate a new lease or extend existing ones. They are offering free rent and tenant improvement funds, among other incentives. And while the average asking lease rate in the second quarter rose two cents from the prior quarter, it is still very competitive at $2.18 full service gross.
Aggressive marketing by landlords should help South County slug its way out of a vacancy rate that stands at 19.3%, down 50 basis points from the first quarter. While the vacancy rate is nothing to brag about, the limited supply of office space coming on line should lead to a continuing decline in vacancy.
South County’s sublease total increased to 420,797 square feet in the second quarter, with an additional 14,575 square feet of sublease space coming on line. This is the highest amount since CB Richard Ellis began tracking vacant sublease space.
The sublease market was a major factor for negative absorption and lower-than-expected vacancy and asking rates in the first quarter.
With the Irvine Spectrum expecting to show substantial increases in absorbed space in the third quarter, the asking rates in the area are expected to hold firm or slightly increase. This could be good news for the balance of South County that is still competing aggressively for tenants.
Tenants still have an outstanding opportunity to lock in below-average market rent for a three- to five-year term. But with the supply of new space limited and absorption expected to increase, the window of opportunity may be nearing an end.
Desper is a senior associate in the Newport Beach office of CB Richard Ellis.
