OFFICE MARKET ASSESSMENT
Orange County’s office market registered its strongest quarterly gain since the pandemic’s onset with 873k SF of direct net absorption in Q2, improving the trailing 12-months total to 537k SF of occupancy gains after experiencing a temporary retraction during the prior quarter.
The countywide direct vacancy rate dropped 80 bps to 13.5% in Q2 and has managed to improve by 100 bps since hitting a 9-year high in 3Q21. Despite the improvement, the countywide vacancy rate remains 230 bps above its pre-pandemic levels.
The Class A sector accounted for the bulk of the quarterly gains with 542k SF of direct space absorbed in Q2, but has experienced 131k SF of occupancy losses over the prior 12 months. Class B properties registered its third straight quarter of leasing gains with 331k SF of direct space absorbed in Q2, bringing the trailing 12-months total to 668k SF.
The majority of the occupancy gains occurred in South County with 612k SF of direct net absorption in Q2, bringing the trailing-12 months total up to 933k SF. The Airport Area also contributed with 393k SF of absorption but has experienced 255k SF of occupancy losses over the prior 12 months.
Touring activity has picked up as occupiers are reevaluating their future space needs and more willing to execute on long-term leasing decisions. The largest deals inked in Q2 included Americor’s 31k SF new lease at 18200 Von Karman Ave, Glasir Group’s 31k SF sublease at 43 Discovery and Lugano Diamonds & Jewelry Inc’s 29k SF new lease at 620 Newport Center Dr.
Leasing activity has accelerated to 7.3 MSF over the trailing 12 months, up 24.1% year-over-year, but remains 24.8% below 2017-19 pre-pandemic levels. Leasing volume totaled nearly 1.9 MSF in Q2, up 29.1% compared to a year ago.
Sublease availability rose by 377k SF in Q2 reaching an all-time high of nearly 3.7 MSF as some occupiers downsized their footprints. Sublease inventory 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.
Class A asking rents have trended downward since the pandemic emerged with a 4.4% reduction from its peak at mid-year 2020 but has stabilized in recent quarters and managed to increase by 1.6% in Q2. Class B rents have also risen by 0.5% Y-O-Y. 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).
The OC office market is expected to remain tenant-favorable with generous concession packages for longer term deals, but pent-up activity should help improve leasing fundamentals and generate more occupancy as employees return to the office and more long-term decisions are made in the year ahead.