It’s a landlord’s market due to the low availability rate for offices. Strong employment growth in Orange 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 over the next several quarters.
Lease rates will likely soften in the next 18 to 24 months as significant amounts of new office product come online next year. Overall fundamentals are better here compared with this time in the previous cycle. The employment base is much more diverse, and employment growth is no longer concentrated in the subprime lending industry. Capital markets are strong, though pricing is still well below the irrationally exuberant levels in 2008.
Asking lease rates continued to increase in the third quarter as owners responded to the lack of availability in the office market. Asking lease rates rose 2.4% over the second quarter and were up 12.7% year-over-year. That’s a very strong rate of growth and not sustainable for long periods of time; however, asking rates are still 7.6% below their previous peak, suggesting there’s still room to run in the short term.
Asking Rates
Asking rates have been driven higher by the high demand for class A office space in some of the tightest markets in the county 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. Year-over-year rents in the Irvine Business Complex and Irvine Spectrum grew 21.4% and 17.8%, respectively.
Orange County’s total net absorption was positive after a negative number in the second quarter, totaling 262,722 square feet.
Office employment remained moderate to strong, and a few large new deals drove positive absorption. The area with the strongest net absorption relative to the amount of vacant space was the Greater Airport Area, where there was 245,078 square feet of positive absorption. Central Orange County was the other main driver in the market, with 90,961 square feet of positive absorption.
Consolidations
The negative movement was driven by several consolidations and move-outs centered on occupants in the finance and insurance industries. Activity was otherwise relatively light. There were a few large leases that bolstered activity in the market, the largest of which was Nationstar Mortgage Holdings for 152,828 square feet.
No buildings were completed in the quarter.
The 200 Spectrum Center property was finished in the first quarter and is already 78.1% leased. New office projects that began construction in the second quarter included Bespoke Irvine and The Habitat in Irvine Spectrum, both under renovation and estimated to be complete in next year’s first quarter. Broadcom Ltd.’s 1.1 million-square-foot corporate campus is scheduled to be complete in 2018. Other notable projects under construction include the 537,224-square-foot Boardwalk project on Jamboree Road. Look for continued growth of creative product in the market if The Boardwalk and similar projects lease quickly.
Analysis provided by CBRE Research
