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Monday, Jul 22, 2024

Local Office Vacancy Falls, Sublease Space Up

1.2M SF Leased During Q2; Hotel Sales Strong

Orange County office vacancy rates fell during the second quarter of this year as strong leasing velocity helped to offset climbing sublet availability.

Vacancy levels fell 1% during the second quarter to 11.3%, according to a market report released this month by commercial brokerage Kidder Mathews. Meanwhile, available sublease space climbed to nearly 3.8 million square feet in the second quarter, its highest level in more than a decade.

OC’s sublet space available represents 2.4% of the region’s total office inventory, higher than Los Angeles’ 2.4% and the average U.S. rate of 2.2%, according to data from CoStar Group Inc.

Still, monthly average asking rents held steady at $2.72 per square foot on a full-service basis, according to Kidder Mathews.

“Leasing activity continued its momentum with nearly 1.2 million square feet being leased in the second quarter as landlords remain aggressive with pricing and offer more concessions to capture tenants,” the report said.

Monthly asking rates for Class A sublet space are 40 cents to 50 cents lower than direct space on average, the report notes.


Office Market

There is 1.2 million square feet of office space under construction locally, the largest project being the third and final phase of Irvine Co.’s Spectrum Terrace office campus in Irvine. The 345,000-square-foot project is set to deliver in the third quarter.

Irvine Co. is also building out the second phase of its Innovation Office Park within the Spectrum submarket.

New deliveries may add pressure to vacancy rates by the end of the year, but strong pre-leasing within the area—including Apple Inc.’s full-building deal at Spectrum Terrace—is expected to offset impacts.

“Despite lingering uncertainty about the future of offices post-pandemic, Orange County’s office market was active for big-dollar sales in 2021, with a half-dozen deals exceeding $100 million,” the Kidder Mathews report notes, adding that last year’s sales volume was the highest since 2017.

The highest priced office sale in over a year was last month’s $235.2 million sale of the four-building Intersect mid-rise office campus in Irvine, near the intersection of Main Street and Von Karman Avenue. It traded hands for about $520 per square foot.

Strong transaction volume “is one reason why the office market is on the mend, with Orange County’s base of office space at around 143.8 million square feet,” the report said.


Hotel Deals

Another hard-hit commercial real estate sector showed strong investment signs last year.

Hotel sales volume last year reached its second-highest amount in the past five years, according to CoStar.

Two hotels have sold above $50 million this year, including the $57.5 million sale of the Portofino Inn & Suites Anaheim and the $145 million sale of the Fashion Island Hotel, which is undergoing a renovation into the Pendry Newport Beach.

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