Office Supply Jumps to 20% in Q1

The office supply in Orange County has increased 110 basis points to 19.9% in the first quarter of 2018, according to a new office report from Savills Studley. During the quarter, the availability of class-A office space increased 180 basis points to 21%, while the availability of class-B and class-C office space increased only 20 basis points 18.6%. Leasing activity also fell during the quarter with only 1.4 million square feet of office space signed, well below the long-term quarterly average of 2.1 million square feet in the market.

“The biggest drivers behind the increase in available office space are the one million square feet in late-stage development, plus the five buildings totaling more than 500,000 square feet that were recently added to the inventory,” Matt Wiley, corporate managing director at Savills Studley, tells GlobeSt.com. “Additional factors include some large subleases hitting the market, and relocations resulting

in a net decrease in space occupancy rather than an increase, likely due to a more efficient use of space.”

Although class-A space had the highest increase in availability, it also had the most leasing activity. That is likely because most of the new office space is class-A. “Class-A space has the highest rate of absorption, but it is also the category with the most deliveries, so the availability remains highest in this class of space as well,” explains Wiley.

Despite the slowdown in leasing activity and the increase in office availability, lease rates continue to grow. Average lease rates grew 9.7% year-over-year during the quarter to $34.30 per square foot and class-A rents increased 13.2% to $38.16 per square foot.  “The increase in class-A space and the increase in rental rates within the category has skewed overall average rental rates higher,” says Wiley. “As more space comes online, however, we expect the higher rates to be ameliorated by greater concession packages.”

While these numbers are certainly striking for the quarter, Wiley says that it should not be concerning for the remainder of the year. In fact, Wiley anticipates that increased activity in the second-half of 2018 will offset the anemic numbers we are seeing today. “A single quarter does not make a trend and the lower overall absorption in Q1 is likely due to some deals falling into late Q4 2017 and some delaying to Q2 2018,” he adds.  “Barring some unforeseen calamity, we expect the lower-than-average absorption in Q1 2018 to be offset by greater activity and absorption through year-end.”