Orange County Rents Grow While Vacancy Rises

The Orange County office market saw negative movement during the first quarter due to Broadcom moving from the Airport Area into the newly constructed campus in South County. This is the largest tenant move the Orange County market has seen in quite some time. Market fundamentals will remain strong as newly built inventory delivers to the market during 2018, giving tenants the opportunity to explore new space options. As tenants seek opportunities to right size and new construction delivers to the market, absorption gains are expected to be limited in coming quarters.

Tenants looking for spaces greater than 100,000 square feet have more options given new office construction deliveries. Tenants searching for space options under 10,000 square feet are currently in the best position. New construction and projects under renovation in the Airport Area, Central County and South County submarkets totaled 1.1 million square feet. Three office projects currently under construction including 2722 Michelson Drive in Irvine, The Flight at Tustin Legacy and The Quad at Discover Business Center. All are expected to be completed in 2018.

Key Takeaways:

  • The Orange County office market saw negative demand in the first quarter, recording negative 298,100 square feet of net absorption due to Broadcom moving from the Airport Area to South County.

  • Asking rental rates increased by $0.02 from last quarter to $2.80 per square foot (PSF) full service gross (FSG).

  • Vacancy increased by 100 basis points to 14.0% from last quarter's 13.0%.

  • Leasing activity decreased from last quarter’s 1.9 million to 1.4 million square feet, falling below the five-year historical average of 1.7 million square feet.

  • Orange County job growth increased by 6,300 jobs in the month of February. Top annual job gains were recorded in educational and health services (9,200 jobs) and professional and business services (8,900 jobs). As of February 2018, the Orange County unemployment rate is still among the lowest in the nation at 3.1%.

Outlook:

Vacancy is expected to trend upward as new office product comes online in coming quarters. New construction deliveries could temper absorption demand through 2018. Rental rates are expected to increase due to new construction deliveries and will start to stabilize through 2018. The Press in Costa Mesa, as well as The Source in Irvine, are expected to start construction mid-2018. Real estate is proving to be a desirable asset as investors continue to look for stable income-producing assets and hedge against perceived upcoming inflation.

Moving into 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 the year are expected to put upward pressure on asking rental rates.