The Orange County office market’s asking lease rates continued to jump in the fourth quarter as owners responded to the lack of availability.
Lease rates rose 4.8% from the third quarter and 16.6% year-over-year. That isn’t sustainable for long periods of time, though asking rates are still 14% below their previous peak, suggesting there’s still room to run in the short term.
Asking rates are being driven higher by the high demand for class A office space in some tighter markets where large blocks of space are scarce. Rents have grown even faster in certain cities that have highly sought-after properties. Rents in Newport Beach and Irvine grew 31.3% and 18.3% year-over-year, respectively.
Net absorption was negative for the second straight quarter after a strong first two quarters of the year. It totaled 1.3 million square feet for the year, just over 1 million square feet behind 2014, the strongest year for positive absorption in Orange County since the recession.
The massive run-up in asking rates was a big factor in the slowdown in absorption last year. The three areas posting positive net absorption in the fourth quarter were South, North, and West Orange County, where there was 205,184 square feet of combined positive absorption. The Greater Airport Area dragged down headline numbers.
The negative movement resulted from a combination of factors including downsizing, relocations, and small tenants taking less space in buildings due to the pace of asking-rate increases. There were fewer large lease deals than average due to market tightness. The largest deal was Bank of America Merrill Lynch taking 88,330 square feet at 520 Newport Center Drive.
No new projects came online during the quarter or were finished. There are over a dozen proposed projects that, if constructed, would add significant additional square footage to a market with sub-10% vacancy rates. The only projects under construction are a 425,000-square-foot prime, class A property by Irvine Company that will be joined at Irvine Spectrum by Broadcom Corp.’s corporate campus.
Irvine Co. has another project planned for Irvine Spectrum that it plans to start early this year. It plans six class A low-rise offices totaling 528,000 square feet. Four three-story buildings will be built at the Discovery Business Center and two four-story buildings at Sand Canyon Business Center. The speculative development will bring some much-needed supply to Irvine Spectrum, where direct vacancy rates are 4.7% and asking rates jumped 11.7% year-over year.
Analysis provided by CBRE Research
