The Orange County office market is currently characterized as a landlord market due to the low availability rate. Strong employment growth in the county continued to be the primary driver of improving fundamentals.
Recently, however, employment growth hasn’t translated into positive net absorption, driven by transitory factors that will dissipate in the very near term.
Aggressively pushing lease rates isn’t a sustainable trend and will likely soften
in the next 18 months as significant amounts of new office product come online.
Fundamentals are overall better in OC compared with this time in the previous economic cycle. The employment base is much more diverse, and employment growth is no longer concentrated in the subprime lending industry.
Asking lease rates continued to increase in the second quarter as owners responded to the lack of availability in the
market, rising 2% from the first quarter and 12.6% from the second quarter of last year.
That’s a very strong rate of growth and not sustainable for long periods of time; however, asking rates are still 9.7% below their previous peak, suggesting there’s still room to run in the short term.
Asking rates are unsurprisingly being driven higher by the high demand for class A office space in some of the tighter submarkets where large blocks of space are harder to come by.
Rents have grown even faster in certain cities that have highly sought-after office properties. Rents in the Irvine Business Complex and Airport Office Area grew 22.2% and 15.8%, respectively, over the second quarter of last year.
Absorption
Orange County’s total net absorption was negative 464,494 square feet for the second quarter after a positive start to the year. Transitory factors tied to some large move-outs, as well as near-peak asking rates, appeared to play a role as office employment growth remained strong in the region.
The area with the strongest net absorption relative to the size of the market was South Orange County, where there was 81,494 square feet of positive absorption. The West Orange County and Greater Airport Areas were the main drivers of negative absorption as a result of several consolidations and move-outs of large financial and healthcare occupiers. Activity outside of that was relatively light in the rest of the county.
There were fewer large leases than
average due to the tightness in the
market.
The largest transaction in the quarter was Apria Healthcare, which leased 50,006 square feet at 26220 Enterprise Court in the Lake Forest district.
Analysis provided by CBRE Research
