The Orange County office market, paced by the accelerating Greater Airport Area, is returning to prerecession peaks by all key measures.
Net absorption continued its recent momentum in the first quarter, and asking lease rates rose by the largest margin in eight years. The Orange County regional economy, compared with California’s strongest economies, has gradually transitioned into an expansion phase, but the healthcare and financial sectors are strongly positioned to incite marketwide growth in the long and short terms.
Tenant demand has been strong and resulted in more than 1.1 million square feet of net absorption, already close to half the 2014 annual total of 2.6 million square feet.
The local economy, hampered by high housing and business costs, is fighting to transition from recovery to expansion. It recently got the kind of lift from technology companies that stronger markets have been getting. OC offers an attractive rental rate compared to Los Angeles and the Bay Area without sacrificing local labor talent or creative-office options.
Ask Up
The first quarter had the biggest jump in average asking rates since the first quarter of 2007, from $2.05 per square foot to $2.12 per square foot, and the biggest year-over-year growth since the fourth quarter of 2007.
The Greater Airport Area led lease rate increases in all areas except West Orange County, whose rate dropped 1 cent. The airport area, which has had the majority of leasing activity over the past two years, had a 12-cent quarterly lease rate increase, the biggest jump for any OC area since the third quarter of 2007.
Class A properties are asking $2.33 per square foot, followed by class B and class C buildings, whose rates are $2 and $1.65 per square foot, respectively.
The overall office market vacancy rate is now about 10%. It’s dropped by just over 2.4 million square feet year-over-year and has consistently decreased over the past four quarters. The remaining vacant square footage includes 50.4% in low-rise space. The largest quarterly decrease in vacancy—1.7%—was in high-rise properties.
Diminishing vacancies and impressive net absorption figures are clearing the way for concession packages to nearly disappear. Many owners are now offering very little if any concessions on rent, and tenant improvement allowances are ranging from $15 to $25 per square foot on five-year transactions. The market is shifting, especially in areas with particularly low vacancies, such as Irvine Spectrum and Newport Center, from tenant-driven to owner- and landlord-favorable.
The airport area has had 67.7% of the overall net absorption since the start of 2014. Yet it seems poised to continue the trend as it has 47.7% of the remaining vacant space in OC.
Hyundai Capital
Three new lease transactions of more than 100,000 square feet were executed during the quarter. Hyundai Capital America, the auto loan division of automakers Hyundai and Kia, signed the largest deal and grabbed one of the few remaining big blocks of space in the airport area when it consolidated a number of its satellite offices into 177,012 square feet at 4000 MacArthur Blvd.
Carrington Mortgage Services signed for 127,250 square feet at the Arena Corporate Center in Anaheim, and the county of Orange leased 111,690 square feet at Orange Center Tower in Central Orange County.
Analysis provided by CBRE Research
