The Orange County office market is currently characterized as a landlord market due to low availability. Strong employment growth in Orange County has been the primary driver of improving fundamentals up until this point in the cycle. Employment growth has somewhat cooled recently, though rents continued to move up as Irvine Company and new institutional owners come into the market with the anticipation that they’ll be able to push rents higher and still retain tenants.
Fundamentals improved to start the year after a somewhat weak second half of last year. Net absorption turned positive after two quarters of decline. Rental rate growth slowed to a more sustainable pace, and there was a healthy amount of construction under way, which will help ease supply constraints.
Asking lease rates continued to grow during the quarter as owners responded to the lack of availability. The asking lease rate rose 2.9% from the fourth quarter and 16% from a year earlier, a rate of growth that isn’t sustainable for long periods of time. Asking rates were still 11.5% below their previous peak, though, suggesting there’s still room to run in the short term. The high demand for class A office space in some tighter markets where large blocks are harder to come by drove up asking rents. Rents grew faster in cities with highly sought-after office properties. Rents in Newport Beach and Tustin grew 20.9% and 30.6%, respectively.
Absorption
Total net absorption turned positive after back-to-back negative quarters to close out 2015. Net absorption totaled 533,471 square feet, just over the average in 2014-2015 of 448,285 square feet. The massive run-up in asking rates last year seems to have only temporarily slowed absorption. The area with the strongest net absorption relative to the size of the market was South Orange County, where there was 228,661 square feet of positive absorption. The West Orange County Area was a modest drag on headline numbers, with negative 30,288 square feet of absorption driven by two midsized move-outs.
Deals, Construction
The largest deal was Volt Information Sciences Inc.’s 15-year lease of 190,000 square feet at 2401-2421 N. Glassell St. in Orange.
Multiple buildings were completed in the quarter, the largest of which was the 425,044-square-foot 200 Spectrum Center, timely given the 5.7% direct vacancy rate in the market.
There are currently 2.8 million square feet of office space under construction in the county. Perhaps the most notable project to break ground in the quarter was 400 Spectrum Center, which is scheduled for completion by September 2017. Another notable project is the 537,224-square-foot Boardwalk project on Jamboree Road, the largest speculative office project in the county. MicroVention’s 205,000-square-foot headquarters, the final phase of Parker Properties’ Summit Office Campus, was still under way in Aliso Viejo. Broadcom Ltd.’s 1.1-million-square-foot corporate campus is still estimated to be complete in 2018, although Broadcom may no longer occupy the full square footage.
Analysis provided by CBRE Research
