Orange County Rents Grow While Vacancy Falls

The Orange County office market saw positive movement during the second quarter as leasing activity increased by 38% compared to last quarter. Currently there are 17 blocks of space greater than 100,000 square feet available for lease. 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.Investment activity was concentrated in Aliso Viejo as multiple buildings traded hands including the Summit Office Campus marking the highest priced transaction in Orange County this year.

Direct vacancy for the quarter was 12.4%, while sublease vacancy recorded at 1.3%. 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. West County supplanted North County as the submarket with the tightest vacancy in Orange County at 8.1%. Net absorption recorded positive at 86,300 square feet, returning to a historical streak of 17th quarters of positive movement. Much of this positive absorption stemmed from South County recording 58,100 square feet. Large tenant move-ins during the second quarter included Vyaire Medical's (184,900 square feet) and Ghost Media (31,400 square feet) moving into Discovery Business Center in Irvine Spectrum. Leasing activity increased from last quarter's 1.4 million square feet to 1.9 million, rising above the five-year historical
average.

Direct asking rental rates increased 2.1% from last quarter to $2.86 PSF FSG. This rental rate increase stems from new construction product delivering to the market. Class A rental rates increased by $0.04 to $3.21 PSF FSG, while Class B increased by $0.10 to $2.64 PSF FSG and Class C increased by $0.02 to $1.89 PSF FSG. New construction and projects under renovation in the
Airport Area, Central County and South County submarkets totaled 1.0 million square feet. The Launch completed renovations during the second quarter. Three office projects are 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. 

Investment activity fell for properties greater than 25,000 square feet compared to one quarter ago, totaling $295.2 million in transaction value. Transaction value decreased by 26% from the first quarter of 2018. Aliso Viejo witnessed an increase in investment activity during the second quarter. Rockpoint Group LLC acquired the Summit Office Campus for $157 million ($325 PSF), which marks the highest price transaction so far this year.

Key Takeaways:

  • The Orange County office market saw positive demand in the second quarter, recording 86,300 square feet of net absorption.
  • Asking rental rates increased by $0.06 from last quarter to $2.86 per square foot (PSF) full service gross (FSG). 
  • Vacancy decreased by 30 basis points to 13.7% from last quarter's 14.0%.
  • Leasing activity increased from last quarter’s 1.4 million square feet to 1.9 million, raising above the five-year historical average of 1.7 million square feet.
  • Orange County job growth increased by 100 jobs in the month of May. Greatest annual job gains were recorded in educational and health services (+9,000) and professional and business services (+8,900). As of May 2018, the Orange County unemployment rate is still among the lowest in the nation at 2.6%.

Outlook:

Moving into the second half of 2018, the Orange County market is expected to maintain positive momentum. Class A and Class B 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.

Vacancy is expected to trend upward as new office product comes online in coming quarters. New construction deliveries could temper absorption demand through last half of 2018. Rental rates are expected to increase due to new construction deliveries and will start to stabilize through the last half of 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.