Companies Make Post-Pandemic Leasing Decisions

Gone are the days when the strength of the office market was solely judged by leases and occupancy rates.

After two years of market volatility that prompted several false starts for the return-to-office movement, brokers are now more closely watching inquiries and tours as office players attempt to gauge where the market is headed.

Based on those latter metrics, landlords and brokers are sighing in relief: companies appear to be making longer-term decisions and plotting their office return, hopefully for good.

“Companies are saying this is behind us, and are starting to make long-term leasing decisions,” Newmark Executive Vice President Greg May said.

Companies across the board—from out-of-town tech firms to local gaming startups—have ramped up leasing activity over the past three months, helping to push the vacancy needle back down.  

Including deals of at least 3,000 square feet and with a minimum five-year term, there were 36 leases inked during the first quarter of 2022, marking a nearly 39% jump from the same period last year, according to preliminary CBRE Group Inc. data.

Vacancy in the area’s office market is hovering around 12%, down slightly from the first quarter of 2020, according to the brokerage’s data.

“I think this will be the time we point to as when the tide changed,” CBRE Executive Managing Director Kurt Strasmann said. “I’m much more bullish than I have been in the past two years.”

Record Increase

The recent change in tide is largely a continuation from 2021, when industrial and essential retail helped bolster the local market and mark a return to gains for sales and leasing activity, which saw its first year of losses in 2020 after about a decade of consecutive growth.

In this year’s Business Journal ranking of commercial brokerage firms, data for which considers 2021 transactions, the area’s top 21 commercial brokerage firms handled about $47 billion in deals last year, a 57.7% jump year-over-year.

That’s the largest percentage increase seen in over a decade, though still below pre-pandemic levels in total volume.

The annual list ranks local brokerages by the dollar values of their commercial property and land deals done in OC last year, as well as those done elsewhere that were handled by the local office.

Industrial Hero

After falling 10% in 2020, the overall number of reported lease transactions regained lost ground in 2021, jumping 9.8%.  

This may be in part to the robust industrial sector, which helped to buoy some brokerages as e-commerce demand swelled, driving demand for last-mile distribution sites.

That growth may have had another ancillary benefit.

“Several million square feet of office space was removed from the market as a result of covered land plays from the industrial sector, which is good news for the challenged office market,” said Strasmann, whose firm once again led the pack for 2021 deals, posting a 55% jump to $6.9 billion.

Early signs of the office return can’t yet justify new office construction, Strasmann added, with developers cautious of overbuilding.

Flight to Quality

The new Irvine Spectrum-area office projects—like Irvine Co.’s Spectrum Terrace and Innovation Office Park—have been holding their own, with tenants prioritizing new, amenity-heavy spaces, May notes.

They’ll pay a premium for it, too, according to Orion Property Partners founder Jay Carnahan, who has handled leasing for the Centerview office campus in Irvine for 15 years.

“With how competitive the job market is, tenants are making decisions based on where their employees want to be, rather than based on rent,” Carnahan said, adding that newer office projects can get away with charging twice as much for rent than the older stock in the airport area.

Properties that have seen significant renovation investments are also holding their own. Centerview, which recently wrapped a $55 million overhaul, has signed 100,000 square feet in new leases since the onset of the pandemic. The complex is about 85% leased.

Monthly asking rents for Class A office projects in OC were about $3.07 per square foot during the first quarter, relatively flat from the year-ago period, according to Newmark.

“Rents are staying firm,” May said, noting that will continue to be the case as tenant interest continues to ramp up.

“We are seeing several inquiries for fairly large blocks of space, both from companies in and outside of OC,” May said.