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Just Released! Voit's Q2 2013 Orange County Office Market Report

Published By: VoitSpace

Orange County Office Market Overview

• Steady Growth - The Orange County office market continued to convey signs of recovery, posting over 1.3 million square feet of positive net absorption in the first half of 2013 and giving the market a total of over six million square feet of positive absorption over the last three years. Both vacancy and availability continued their downward trends, while lease rates appeared to be finally beginning an upward trend. While these are positive indications, stability will need to be sustained in coming quarters to be considered recovery.

• Construction - The record year for new development was 1988, when 5.7 million square feet of new space was added and vacancy rates were approximately 24%. Total space under construction came in at nearly 1.4 million square feet for the first quarter of 2013; the most notable projects were two build-to-suit projects: Hyundai in Fountain Valley (469,000 square feet) and PIMCO at Fashion Island in Newport Beach (479,800 square feet).

• Vacancy - Vacancies continued their downward trend in the second quarter. Direct / sublease space (unoccupied) finished the quarter at 12.49%, a substantial decrease from the previous year’s rate of 14.53% and significantly down from both the Great-Recession peak of nearly 18% in the second quarter of 2010 and the market high of 23% recorded in 1990. We are forecasting that vacancy will continue trending downward in 2013, ending the year around 11.6%.

• Availability - High-end Class A space captured recent gains in occupancy. Direct / sublease space being marketed was at 17.78% at the end of the second quarter of 2013 — a decrease of over 6.5% when compared to 2012’s second quarter rate of 19.02% and about the same as last quarter’s rate of 17.76%.

• Lease Rates - The average asking full-service gross (FSG) lease rate per month per square foot in the Orange County office market was $1.89 at the end of the quarter — a 1.05% decrease from the previous year’s rate of $1.91 but one cent higher than the previous quarter’s rate of $1.88, hopefully, indicating a bottom in the downward trend of asking lease rates. In fact, this is the first increase in the average asking lease rate since the fourth quarter of 2007, when the record-high rate of $2.77 was established. Class A asking rates for the county averaged $2.06 FSG — the highest being in the North County submarket where Class A rates averaged $2.18 FSG. We are forecasting that rates will continue to increase in 2013.

• Absorption - The Orange County office market posted over 730,000 square feet of positive absorption this quarter — 470,000 square feet of Class A space and 250,000 square feet of Class B space, giving the market a total of over 2.6 million square feet of positive absorption over the past four quarters. Look for research-oriented businesses — IT, defense, medical and alternative energy companies — to lead the charge of positive absorption over the next few years.

• Transaction Activity - Leasing activity checked in at 1.8 million square feet in the second quarter of 2013, a decrease from the 2.6 million square feet we saw in the second quarter of 2012. Sales activity was down as well, posting 390,000 square feet of activity in the second quarter of 2013 compared to 2012’s second quarter figure of 710,000 square feet. Details of the largest transactions for the quarter can be found on the back page of this report.

• Employment - The unemployment rate in Orange County was 5.5% in May 2013 — down from a revised 5.7% in April 2013 and below the previous year’s estimate of 7.5%. This compares with an unadjusted unemployment rate of 8.1% for California and 7.3% for the nation during the same period. According to the State of California Employment Development Department, Orange County saw a net increase of 24,500 payroll jobs from May 2012 to May 2013. The largest gains were 6,500 in financial activities and 6,400 in construction; however, Orange County lost 1,200 jobs in the trade, transportation and utilities sector during that same period.

• Overall - We are beginning to see a decrease in the amount of vacant and available space. As we progress into the second half of 2013, positive absorption should continue, and with few new deliveries in the pipeline to apply upward pressure on vacancy, the market will continue to stabilize. We foresee an overall increase in investment activity in the coming quarters. Lease rates have begun to increase, and we expect the trend to continue in the coming quarter. We should also see an increase in leasing activity as many short-term deals come up for renewal. As job creation continues and consumer confidence stabilizes, the office market will continue to recover.

Release Date07/16/2013 - 07:00



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