Lee & Associates 2nd Quarter Office Market Update
Q2 Absorption Gain; Companies Flock to South County
After a sluggish start early this year, demand for Orange County office space surged in the second quarter, posting the biggest gain in six quarters. Lease rates continued to climb in the largest submarkets, keeping the countywide average on pace next year to equal its all-time high.
Demand intensified in the South County submarket, which is anticipating completion next year of nearly 1.8 million sq. ft. of Class A high-rise and campus-style buildings. Countywide, 11 buildings totaling 2.4 million sq. ft. are under construction and ground-up development costs are reaching $600 per square foot. Ignoring low capitalization rates, however, investors are piling into well-located office assets, favoring Class B low-rise campus-style buildings they believe will command upwards of 25% more in rents when updated as modern “creative” space.
Eight of the new buildings underway are in the South County submarket, which checked in with 338,364 sq. ft. of positive absorption in the second quarter, driving the vacancy rate down to 9%. It was the third consecutive quarterly gain totaling 713,176 sq. ft. in South County, which totals 23.3 million sq. ft. and includes Irvine Spectrum. The Irvine Company is under construction on six mid-rise buildings totaling 528,000 sq. ft and a 21-story highrise. The Airport submarket, the county’s largest with 42.5 million sq. ft., has seen companies shed nearly 200,000 sq. ft. in the last three quarters. Its vacancy rate was unchanged at 10.8% in Q2, and asking rents gained 10.4% year-over-year. The availability rate jumped to 17% due, in large part, to the planned move by Broadcom out of Irvine’s University Research Park, which put about 900,000 sq. ft. on the market. The submarket includes Newport Beach, Costa Mesa, Fountain Valley and south Santa Ana.
With 14.1 million sq. ft. in total inventory, the North County submarket rebounded in Q2 with 26,606 sq. ft. coming off the market, dropping its vacancy rate to 10.5%. Year-over-year net absorption in North County totaled 276,231 sq. ft. but the submarket, which includes Fullerton, Buena Park, Yorba Linda and Placentia, has yet to post more than two straight quarters of positive absorption since the recession.
Absorption in West County settled on the plus side in Q2, but over the last six quarters is 172,319 sq. ft. in the red. Average rents virtually are unchanged from a year ago. Despite about 95,000 sq. ft. of negative absorption in Cypress, the vacancy rate in the small 8.9 million sq. ft. submarket that includes Los Alamitos and Huntington Beach
was unchanged at 10%.
The 14.4% vacancy rate in the 22.4 million sq. ft. Central County submarket is greatly influenced by the 18% vacancy in Santa Ana’s 14.3 million sq. ft. Other cities in the submarket include Orange, where 7% of its 6.6 million sq. ft. are empty, and Anaheim with 7.4 million sq. ft. at 13.1% vacancy.
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