OFFICE MARKET ASSESSMENT
Orange County’s office market retracted with 293k SF of direct space turning vacant in Q1 after showing initial signs of recovery late in 2021 with its strongest quarterly absorption gain since the pandemic’s onset and leasing activity reaching pre-pandemic levels.
The countywide direct vacancy rate has risen 80bps from a year ago to 14.2% but has exhibited signs of stabilization in recent quarters. Even though direct vacancy rose by 30bps to 14.2% in Q1, the vacancy rate has managed to improve by 30bps since hitting a 9-year high in 3Q 2021.
The Class A sector accounted for the bulk of the occupancy losses with 371k SF of direct space becoming vacant in Q1, pushing the trailing 12-months total to 891k SF of occupancy losses. On a positive note, Class B properties registered its second straight quarter of leasing gains with 77k SF of direct space absorbed in Q1, bringing the trailing 12-months total to 253k SF.
The bulk of the negative absorption occurred in the Airport Area, which resulted from several large move-outs involving Happy Money (72k SF at 1700 Flight Way), Alliant Insurance Services (53k SF at 1301 Dove St), and HireRight LLC (40k SF at 3349 Michelson Dr).
Sublease availability rose 538k SF to 3.3M SF in Q1, reversing a trend of two consecutive quarterly declines, but inventory remains below its all-time high of 3.4M SF at mid-year 2021. Sublease availability will likely remain high as employers adapt to new workplace strategies and continue to optimize their footprints to best fit their needs and future business plans.
Leasing activity has accelerated to 6.8 MSF over the trailing 12 months, up 12.9% year-over-year, but remains 28.3% below 2017-19 pre-pandemic levels. Leasing volume totaled 1.8 MSF in Q1, up 9.3% compared to a year ago.
Touring activity picked up as occupiers are re-evaluating their future space needs and more willing to execute on long-term leasing decisions. The largest deals inked in Q1 include Carrington Mortgage Services’ 128k SF renewal at 1600 S Douglass Rd, Cap Diagnostics’ 54k SF new lease at 15545 San Canyon Rd and Wells Fargo’s 46k SF lease renewal at 2030 Main St.
Class A asking rents have trended downward since the pandemic emerged with a 5.9% reduction from its peak at mid-year 2020 but has exhibited signs of stabilization over the past 6 months. Class B rents have risen over the past 3 quarters to return to their prior peak. However, effective rents experienced downward pressure as landlord concession packages remain aggressive to attract and retain tenants.
The construction pipeline remains active with 1.2 MSF underway currently 48% pre-leased. Three major projects are slated to deliver by year-end 2022, which include The Press (449K SF pre-leased to Anduril), the third phase of Spectrum Terrace (375k SF across 3 buildings), and the second phase of Innovation Office Park (259k SF across 7 buildings).
Orange County’s office market is expected to remain tenant-favorable, but pent-up activity should help improve leasing fundamentals and generate more occupancy as employees return to the office and more long-term real estate decisions are made in the year ahead.