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OC’s Office Market Swings in Tenants’ Favor

Orange County’s office market may switch to a tenant’s market sooner rather than later, as brokers and tenants prepare for a looming increase in vacancies as a result of a smaller workforce and continued stay-at-home orders.

“For several years, we have had limited supply and great demand, and that is starting to flip,” said Royce Sharf, executive vice president at the Newport Beach office of tenant brokerage Savills.

“Tenants are already waiting to make decisions because they can smell a deal around the corner.”

OC’s office market, running some 120 million square feet, counted a vacancy rate of 11.3% at the end of the first quarter, up marginally from 11.2% a year ago, according to data from Newport Beach’s Voit Real Estate Services.

In general, vacancy rates topping 10% favor tenants during lease negotiations, and developers prefer to build new product when vacancies are in the single digits.

The year-over-year uptick was in large part due to new office projects in Tustin and the Irvine Spectrum opening; the region’s office development isn’t as extreme as at the onset of prior recessions, Sharf said, citing the issue of overbuilding that was prevalent in the lead-up to the Great Recession.

This “was a more conservative development cycle,” which will help buoy leasing and sales activity in a downturn, according to Sharf.

Lowered demand will create an aggressive fight for credit-worthy tenants, both for offices and industrial buildings, he said.

Even new office buildings that have yet to deliver, such as those in the Irvine Spectrum submarket, may not have an issue building occupancy, with tenants “often making a flight to quality in times like this,” Sharf said.

“I could see those buildings faring very well in what will be an incredibly competitive environment.”

Too Soon to Tell

Orange County ended the first quarter with monthly asking rates of $3.04 per square foot, up from $2.94 a year ago, according to Savills first-quarter data.

Initial impacts of coronavirus on the local real estate market are likely to show in second-quarter reports, but the severity remains to be seen.

Likewise, while tenants are likely to change their dealmaking approach in a market that is more favorable to them, the extent of these renegotiations remains to be seen, as well.

“There hasn’t been enough leasing velocity as of late in order to get a sense for current market dynamics,” Sharf said.

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