Don’t Fret Over Central OC Office Performance

The Central Orange County office market has had an anemic start to the year. The market lost two large tenants to the Airport Area and has had negative absorption of 67,741 square feet—down 35 basis points, according to research from JLL. It isn’t all bad news. Orange County office leasing, in general, has been flat this year, so the Central OC market is on trend. Even better, rental rates have continue to rise and the vacancy rate is down nearly a full percentage point year-over-year.

“2018 year-to-date net absorption is only down 35 basis points, so it’s unfair to say Central County has experienced any significant negative absorption.  Two large tenants, AAG and UFC Gym, who together account for 82,000 square feet, both relocated to the Airport Area,” Scott Wetzel, VP at JLL, tells GlobeSt.com. “Still, it’s important to note that year-over-year vacancy rates lowered from 13.1% to 12.3%  and rental rate growth remains strong.  Over the past 12 months, average asking rates have increased nearly 13%.  This is a healthy sign for the Central County submarket, especially in contrast to Orange County’s most prominent submarket, the Airport Area, where rental rates are starting to plateau as double-digit rent growth has ticked down to the high single-digits.”

The Stadium Area is leading the submarket, with 8.6% vacancy rate and a $2.75 average asking rental rate. While it did lose two large tenants, the market has also seen several large lease deals, including a 66,818-square-foot US government lease in Tustin; a 61,002-square-foot lease in Garden Grove and 59,927-square-foot lease in Orange for the County of Orange; and a 52,095-square-foot lease for CNI College in Santa Ana. “Government and healthcare are far and away the market leaders.  The County signed two deals totaling 127,000 square feet. As hospitals continue to expand, they are running out of room for administrative professionals, causing them to make way for doctors, nurses, physician assistants and patients,” says Wetzel. “This has caused several prominent healthcare companies to relocate and/or consolidate administrative professionals to free up space for medical personnel. Tangentially related is CNI College, a nursing school, who signed a lease for 50,000 square feet in Santa Ana. Lastly, we are also seeing the construction industry continue to expand, with several firms—such as Swinerton Builders—opt for a more centrally located facility so they can more easily access projects in L.A. County and the Inland Empire.

Back-office users have generally driven leasing activity in the market, but many of these users are moving out of the state. This trend has slowed leasing velocity and contributed to the anemic activity this quarter. “The Central County office submarket is largely driven by back-office tenants such as mortgage and healthcare companies,” explains Wetzel. “The long-standing trend of these companies relocating out-of-state to find lower cost labor is continuing, which has contributed to the lack of leasing velocity, as has the uptick in interest rates which has eaten into mortgage companies’ refinancing business for residential homeowners.”

The Central OC office market is nuanced, but is generally on trend with the leasing activity in all of Orange County for the first half of the year. “As a whole, Orange County net absorption is positive 15 basis points this year—a similarly flat leasing velocity to that of Central County,” says Wetzel. “The twin-headed dragon of OC’s two most prominent submarkets offer opposing storylines as to why that is the case, inversely mirroring one another. The Airport Area submarket had 1.3 million square feet of negative net absorption year-to-date, generally due to Broadcom’s relocation to Irvine Spectrum and Trammell Crow Company’s delivery of The Boardwalk, a nearly 600,000-square-foot development.  Conversely, the Irvine Spectrum has enjoyed 1.5 million square feet of positive net absorption, primarily due to the fact that the Irvine Company’s new developments were either (a) delivered a couple years ago and have had a healthy runway for leasing, or (b) have succeeded to prelease large chunks of their low and mid-rise developments such as The Quad and Sand Canyon Business Center.”