TENANTS CAUTIOUS AHEAD OF REOPENING
The first quarter was another period of ailing tenant demand as many companies continued to assess their post-Covid operational needs in an economy that looks poised to rebound this year.
Compared to the negative 1.13 million SF of net absorption in the closing quarter of 2020, 776,138 SF of negative absorption was posted in the first quarter as vaccine distribution was well underway and re-opening of the state by mid June was announced by the governor.
One bright spot in Q1was a lease by Anduril – a startup surveillance and security company founded by local tech mogul Palmer Luckey – of a record 639,206 SF of creative space on 24-acres. The office campus is on the Costa Mesa site of the former Los Angeles Times offices. Luckey was 22 years old in 2014 when Facebook bought his Oculus virtual reality gaming company for $3 billion. Plans are for Anduril to relocate its 350 jobs from Irvine to the new offices in the second half of 2021 when many companies expect to fully reopen offices.
Also notable in the first quarter was the sharp reduction in new sublease space hitting the market, down from 678,839 SF over the second half of 2020 to 127,177 SF in Q1. The total of vacant sublease space is 1.76 million, which includes 806,000 SF of vacant second-hand space added since the lockdown.
Of the nation’s 80 largest office markets, Orange County has the 65th highest vacancy rate and is 67th in 12-month absorption.
There has been a slight decline in asking lease rates since the lockdown as landlords largely have been standing pat on rents, opting instead to reduce effective rates with free rent and other concessions. Nevertheless, with office users currently enjoying the upper hand, it follows that many building owners and managers have redoubled their tenant retention efforts.
There were declines in first-quarter tenant demand in the Airport, South County and Central County office markets which represent nearly 80% of the county’s 117.4-million-SF total inventory.
The largest decline was in the 26.9-million-SF South County market. After closing 2020 with a slight net gain in tenant growth, companies shed 529,857 SF in the first quarter. The year-over-year vacancy rate is up from 11.4% to 15.1%, which includes delivery of four buildings totaling 414,000 SF. Four buildings totaling 217,510 SF are under construction.
There was 292,623 SF of negative Q1 net absorption in the 43.7-million SF Airport market, an improvement from the previous two quarters when absorption was 1.26 million SF in the red.
In the 22.5-million-SF Central County market negative net absorption in Q1 totaled 97,567 SF.
There was 83,195 SF of positive Q1 absorption in the 14.5-million-SF North County market and 60,174 SF of growth in the 9.7-million-SF West County market.
In Cal State Fullerton’s latest business expectations survey of local executives, the university’s economists say the overall index at the beginning of the second quarter jumped to 95.3 from 71.6 in Q1, hitting highest level since the end of 2018. The proportion of executives polled that expect improved activity increased to 81.9% from 39.4% in Q1.