The strong improvements occurring in the Orange County economy have clearly carried over to the fundamentals of the office market here.
Average asking lease rates in all five submarkets moved up during the third quarter.
The increased asking rates came even with negative absorption driven by move-outs in South Orange County and the Greater Airport Area. Availabilities still decreased in many instances, however, a clear sign that demand in the market is strong and there is no shortage of replacements for departing tenants.
Vacancy rates in Irvine increased from 5.7% to 6.8%, for example, while availability fell from 12.5% to 11.7%, a sign of health in the broader market.
The asking lease rate rose 2.2% from the second quarter and was up 11.7% from a year earlier.
Asking rates are still 17.9% below their previous peak, suggesting there’s still room to run in the short term. Asking rates are unsurprisingly being driven up by the high demand for class A office space in some of the tighter markets in the county where large blocks of space are harder to come by. Rents have grown even faster in certain cities with highly sought-after properties. Rents in Newport Beach and Irvine grew 26.7% and 12.3%, respectively, from a year earlier.
Net Absorption
Orange County’s total net absorption turned negative during the quarter after a strong first two quarters. Year-to-date net absorption remained positive at 1.5 million square feet, however, only slightly behind year-to-date figures a year earlier, which was the strongest year for positive absorption in Orange County since the recession.
The only area to post positive net absorption was West Orange County, which had 18,071 square feet of absorbed space. South Orange County dragged down the total with negative 199,391 square feet of net absorption, increasing the amount of total vacant square feet in the area by 13.9%.
The negative movement was driven by a combination of factors, including downsizing, relocations, and tenants moving out due to building rehab that affected a wide range of predominately midsize tenants. There were fewer large lease deals than in the second quarter. UST Global Inc. signed a 10-year, 78,700-square-foot lease at 5 Polaris Way, where it will take the whole building when Quest Software vacates.
The Irvine Company’s project at 200 Spectrum was the only prominent ground-up office building until the third quarter. It has been under construction since last year’s third quarter and is scheduled to be completed in April.
Broadcom
Now the 425,000-square-foot, prime class A property will be joined by Broadcom Corp.’s corporate campus in Irvine as a project in the works.
Broadcom is building a 1.1-million-square-foot corporate campus in the Irvine Spectrum submarket that’s projected to be completed in 2018. It will be the first commercial development at the Great Park Neighborhoods mixed-use, master-planned community.
Irvine Co. has another project planned for Irvine Spectrum that it plans to begin early next year: It will build six class A, low-rise office buildings that will total 528,000 square feet of office space.
Analysis provided by CBRE Research
