Ingham: u201cWe see more natural lease activity coming up with companies expanding and leases expiring in 12-18 months.u201d

IRVINE, CA—Some office absorption statistics for Orange County’s first quarter may paint a picture of doom and gloom, but that’s not what’s going on, say Jeff Ingham, SVP, and Bryce Mordoff, senior research analyst, for JLL. A market returning to more normal leasing activity after an unusual spate of leasing is what we’re really seeing, the executives tell GlobeSt.com.

As GlobeSt.com reported last week, the county’s office market just finished a rather lackluster first quarter of leasing. According to a report from JLL, the majority of lease transactions completed in the first quarter of 2014 came from in-place renewals as opposed to new deals and relocations, resulting in negative absorption of more than 377,000 square feet. Also, as GlobeSt.com reported last week, Voit Real Estate Services reported that class-B space was mostly responsible for the positive absorption in this sector during the quarter, casting perhaps a bit of doubt on the class-A arena.

But Ingham and Mordoff say this is not cause for worry. “We predicted a couple of years ago that there would be an absolute lull in leasing in the 2013-2014 time frame,” Ingham tells GlobeSt.com. “A lot of tenants were doing blend and extend leases in 2012, and landlords were looking to refinance their buildings. A lot of transactions occurred in 2011-2012 that were lease expirations. Some of the renewals that would’ve occurred this year and last year actually took place in 2012.”

Ingham says the county’s office leasing activity is significantly higher than it was this time last year. “Now we see more natural lease activity coming up with companies expanding and leases expiring in 12-18 months. This is more normal, and we expect 2014 to be much more normalized. Companies are not doing blend and extend or early renewal. This is typical growth and natural leases coming up for renewal.”

According to Cushman & WakefieldOrange County’ negative 539,462 square feet of office absorption during Q1 was due to Fisker Automotive and AT&T vacating two buildings, which increased vacancy half a percentage point to 15.4% since fourth quarter 2013. Leasing remained robust at 1.9 million square feet and on par with Q1 2013 activity, and the addition of class-A space to the market increased asking rental rates 3.3% from last quarter to $2.17 per square foot per month.  

The message being sent in JLL’s research reports is that there is somewhat of a disconnect between the rental rates and absorption numbers seen during Q1, Mordoff adds. “Rent growth is more reflective of how people are feeling. The negative absorption is more of a timing issue, with Hyundai moving out of Costa Mesa space and into its new Fountain Valley build-to-suit. It was the timing of a big move-out and the lull of leasing activity.”

Voit reports that office construction for the quarter came in at just over 900,000 square feet, still largely consisting of build-to-suit projects and little to no spec development underway. Both Voit and the JLL executives named only one project—520 Newport Center Dr. in Fashion Island, a 479,000-square-foot project for PIMCO—that is technically a spec building since no preleasing has been done. “But Fashion Island is a bubble market in and of itself,” says Ingham. And Mordoff adds, “Irvine Spectrum and Newport Center are two anomaly markets where rents are far outpacing market average.”

According to JLL, significant office sales that closed during the quarter included 18301 Von Karman Ave. in Irvine, sold by Greenlaw Partners to CIGNA for $67.6 million; 2400 Katella Ave. in Anaheim, sold by CW Capital Asset Management to the CIM Group for $60 million; 200 E. Center St. in Anaheim, sold by AT&T to PRES Cos. for $18 million; and 500 N. State College Blvd. in Orange, sold by CW Capital to Starwood Capital Group for and unnamed price.