Orange County Rents Increase to Finish 2017

The Orange County office market leasing activity increased momentum during the fourth quarter. Construction activity continued to be a key trend. The Boardwalk in the Airport Area and Five Point Gateway Campus in South County were delivered, adding 1.6 million square feet to the inventory base. Of the 1.6 million square feet of new office inventory, 54% has been pre-leased. Market fundamentals will remain strong as newly built inventory delivers to the market, giving tenants the opportunity to explore new space options. As tenants seek right-size space options and new construction delivers to the market, absorption gains are expected to be limited in coming quarters.

Despite positive demand recorded in the fourth quarter, overall vacancy increased by 50 basis points compared to last quarter due to the delivery of The Boardwalk and Five Point Gateway campus. West County supplanted North County as the submarket with the tightest vacancy in Orange County at 8.1%. Net absorption remained positive for the 16th consecutive quarter recording 585,600 square feet. South County recorded the highest positive absorption at 377,800 square feet. The Airport Area submarket recorded negative demand (-22,300 square feet). Leasing activity increased from last quarter's 1.7 million square feet to 1.9 million, in line with the five-year historical average.

Key Takeaways:

  • The Orange County office market saw positive demand in the fourth quarter, recording 585,600 square feet of net absorption.

  • Asking rental rates increased by $0.08 from last quarter to $2.78 per square foot (PSF) full service gross (FSG).

  • Despite positive demand, vacancy increased by 50 basis points to 13.0% due to the delivery of The Boardwalk and Five Point Gateway.

  • Leasing activity increased from last quarter’s 1.7 million to 1.9 million SF; in line with the five-year historical average.

  • Orange County job growth increased by 10,000 jobs in the month of November. Annual job gains in trade, transportation and utilities (5,500 jobs) and professional and business services gained (2,600 jobs). As of November 2017, The Orange County unemployment rate is still among the lowest in the nation at 2.8%.

Outlook:

Vacancy is expected to trend upward as new product comes online in coming quarters. As the unemployment rate is at a historical low level, absorption is expected to remain positive. Rental rates are expected to increase due to new construction deliveries and will start to stabilize moving into 2018. The Press located in Costa Mesa as well as The Source located in Irvine are expected to start construction during first quarter 2018.

Minimal federal interest rate increases should help keep investment activity steady through 2018. Moving into the start of 2018, the Orange County market is expected to maintain positive momentum. Class A asking rental rates have increased as the Airport Area and South County submarkets have reached historical peaks, while Central County, North County and West County submarkets continue to see slow but positive growth. New developments coming online during 2018 are expected to put upward pressure on asking rental rates.