Demand for Orange County office space in 2017 has fallen by half compared to earlier in the economic recovery, and rates of rent growth also have slowed dramatically this year, according to Lee & Associates’ third-quarter survey of Orange County’s 112.4-million-sq.-ft. office market.
Net absorption through the first three quarters still is in positive territory, totaling 593,968 sq. ft., but the volume of space coming off the market so far this year is 49.8% less than in the average of first three quarters of each year since 2011.
Additionally, steady quarterly gains in lease rates have slowed, especially for Class A office space. New data shows that Class A asking rents have increased 3% this year compared to the 10.2% average increase for the same nine-month period in the last three years.
Plenty of economists have prophesied about eight-year real estate and economic cycles to help explain the softening of office markets nationwide that has been widely reported this year. It’s clear that local office demand has lost some steam despite a still solid local recovery and a strong national economy that in Q3 grew at a 3% annual rate.
Locally, the sudden downshift in demand is altering expectations for landlords, particularly those in the Airport and South Orange County submarkets, where new premium buildings are hitting the market. Two buildings totaling 671,696 sq. ft. were delivered in Q3 and eight buildings totaling 1.4 million sq. ft. are underway.
Buildings in South County and around John Wayne Airport comprise nearly 60% of existing county office space as well as the county’s newest Class A buildings. But the two submarkets have gone in different directions this year. South County’s net absorption year to date totals 385,265 sq. ft. versus a negative 328,959 sq. ft. through Q3 in the Airport submarket. The South County vacancy rate is 9.4% compared to 11.4% at the Airport, where a 537,000-sq.ft. office building is slated for completion early next year with no major tenants announced, so far.
The vacancy rate in the small 8.9-million-sq.-ft. West County submarket settled at 7.3% on 44,613 sq. ft. of net absorption in Q3.
The 22.3-million-sq.-ft. Central County submarket, which includes Orange, Anaheim, Garden Grove, Santa Ana and Tustin, ended Q3 with an 11.5% vacancy rate. Net absorption was negative by 74,198 sq. ft. in Q3 but is up 420,960 sq. ft. for the year.
The 14.2-million-sq.-ft. North County office market posted a 9.5% vacancy rate in Q3 with net absorption of 43,968 sq. ft.
Full Report Available 3Q 2017 Orange County Office Market Report
The Orange County Office Market Report is published quarterly by the Lee & Associates’ Irvine, Newport Beach and Orange offices. ©2017 Lee & Associates, Inc.