Sharf: u201cTenants seeking large, contiguous blocks of space are finding options limited, particularly in select submarkets.u201d

ORANGE COUNTY, CA—The recovering Orange County office market appeared to lose momentum through the final quarter of 2013, according to a recent report from Studley. The firm says that regional hiring slowed and market dynamics became less fluid, creating a stagnant atmosphere for a market struggling to recoup its recession losses.

According to the report, which analyzed office-market conditions in the region, leasing volume declined to 7.1 million square feet in 2013—nearly 20% less than the long-term historical market average—from 9.1 million square feet in 2011 and 7.6 million square feet in 2012.

Users could take advantage of the slowed momentum in a number of ways. According to Royce Sharf, EVP and branch manager of Studley’s Orange County office, “While leasing velocity has slowed significantly, tenants seeking large, contiguous blocks of space are finding options limited, particularly in select submarkets such as Newport Center and Irvine Spectrum. As a result, an increasing percentage of major tenants are opting for renewals, although a build-to-suit or preemptive strike to backfill a ‘to be vacated’ property in a proposed development could be a rewarding opportunity for the right user.”

The report also says that new construction activity remains restrained, with nearly all projects underway being build-to-suits or medical-office product. As of year-end 2013, Orange County had only 1.4 million square feet under construction, with 94% of it pre-leased. The lack of new construction and the flight to quality that took place early in 2013 has contributed to a decline in available space, with the overall availability rate falling by 0.3 percentage points to 15.5 percent age year end and decreasing by 1.6 percentage points year over year. The class-A rate, while at its lowest point since the third quarter of 2007 at 20.4%, is still well above the 10.5% availability rate recorded in year-end 2005.

Asking rates for class-A space have begun to creep up, and owners of all classes of properties have pulled back on concessions, the report continues. This has resulted in overall asking rents increasing in the fourth quarter to $23.46 per square foot, rising 2.1% as compared to the previous quarter, and class-A asking rents rising by 2.2% to $24.48.

The creative-space trend, while not as popular in Orange County as in the more urban major markets, is beginning to grow here, with office space functionality, design and layout changing and the demand for “non-traditional” space increasing. Even more traditionally conservative tenants such as law firms, consultants and professional-services firms have begun to embrace these changes. As reported last week, while there has been a contraction in the mortgage-lending industry, other fields are taking over, with new tenants including a diverse mix of media, tech, financial, healthcare and residential real estate.

A healthier housing market and the still-churning mortgage-banking industry are continuing to contribute to the market’s stabilization here. However, the region is still lagging in most major metros in terms of office-using employment.

According to Sharf, “Companies with requirements in the 10,000- to 15,000-square-foot range will still have a deep poll of space to choose from, and therefore considerable negotiating power, but should still expect a moderate pullback in concessions and a higher overall effective rental rate.” He adds that tenants seeking larger blocks of quality space—particularly in select submarkets—will need to begin their search well in advance of lease expiration and consider alternative strategies and opportunities.