Orange County’s office market remained steady in the third quarter, posting small gains in rental rates, vacancy and absorption.
The gradual market improvements have been fueled by improvements in the financial sector, the steady recovery of the U.S. economy, and general optimism about the local office market’s future.
Lending services, architectural firms and medical companies have grown and branched out in the county. There have been a few notable move-outs, but there was 155,430 square feet of positive absorption in the third quarter, bringing the year-to-date net absorption total to more than 1 million square feet and marking the 14th consecutive quarter of positive net absorption.
The current health of the Orange County office market is largely market-specific. Certain areas and sectors have been outperforming others, while some continue to lag.
Vacancy in high-rise, class A buildings continued to decrease, which was likely due to the competitive rates of quality office space, as well as generous landlord concessions. The “flight-to-quality” tenant trend was prominent through the first three quarters.
Asking prices are expected to rise and concessions to decrease as vacancies fall in those buildings. Tenant interest in creative-office space has remained prevalent, although the supply is relatively low in the county. Central County and North County have consistently underperformed in recent years but combined to post more than 300,000 square feet of absorption so far this year and are also experiencing rising rental rates.
Average asking lease rates have remained flat for nearly three years. The countywide average, despite pockets of rising rental rate growth, remains less than $2 per square foot. Many areas and specific projects are having rental rate bumps of 5 to 10 cents per square foot, but landlords continue to make deals at competitive rates.
The Orange County average asking lease rate, currently at $1.93 per square foot, increased 1 cent in the third quarter and 2 cents over the year-ago average of $1.91 per square foot. The slow rental rate growth has been referred to as a “solid-flat market.” Rental rates may be the last market factor to recover to prerecession levels.
A sharp decline is projected in net absorption by year-end, despite the consistent improvements in the office market. That’s due to companies that are planning to downsize or vacate their spaces by the end of the year. The numbers may change, but increased confidence in new development reveals the market’s optimism.
Analysis provided by CBRE Research
