Office Leasing Activity Doubles in Orange County
Office leasing activity surged in the fourth quarter 2018, nearly doubling with 2.2 million square feet of leases signed.
“While many predict a cooling of the economy, the County is still projected to add more than 28,000 new jobs this year,” Randy Parker, senior managing director at Savills Studley Orange County, tells GlobeSt.com, adding that he was not surprised the market performed so well. “Several large transactions were successfully completed in the fourth quarter including: Taco Bell, at 181,000 square feet; Glaukos, at 165,000 square feet; AltaMed, at 90,500 square feet; Google, at 44,000 square feet; and WeWork, at 64,000 square feet. Bottom line, Orange County’s labor market has gone from one of the worst to one of the best. Executives are bullish on the future, and are committing to long-term lease transactions.”
While the leasing activity was double the fourth quarter, many of these leases had been on the books. “However, the lack of large blocks of well-located, class-A space may have contributed to a rush to close these deals,” says Parker. “Co-working providers are targeting Orange County as the region gains prominence as a tech hub. The County now has over 1.2 million square feet of co-working space, which represents an increase of 20% versus the prior year.” Despite the strong leasing activity, the vacancy rate remained unchanged at 19.2%, while the class-A vacancy rate actually increased to 21.9%.
That may be because renovated office projects with more progressive or modern aesthetic have performed the best in Orange County. South Orange County, which is largely owned by the Irvine Co., which has developed and redeveloped properties in the market. “The Irvine Co. has done a great job of building new projects that are amenity-rich, and include fitness centers, conference rooms, outdoor areas complete with soft seating, WiFi, TVs, barbeques, and cars that can be rented for the day,” says Parker. “Other landlords have had to implement similar upgrades in order to compete. As a result, low-rise and mid-rise buildings that have incorporated some, or all, of these offerings, and have free parking, have proven to be very attractive to tenants of all sizes. If a major project anywhere in Orange County does not have what are now considered “standard” amenities, that landlord is at a major disadvantage.”
Along with the stagnant vacancy rate, the office rental rate has also remained stagnant, ticking up only .5% for the quarter to $35.71 per square foot. New development has also contributed to tempering the rental rate. “Orange County’s office market has expanded this year, driven largely by new development in the Irvine Spectrum. Larger tenants looking for the highest quality blocks of space in prime locations have new opportunities to consider,” says Parker. “These new developments also come with much higher asking rents, which are close to $48.00 per square foot. In contrast, rents for well-located existing projects in the Airport Area and the Irvine Spectrum have flattened somewhat, driven by a slight uptick in vacancy rates and the availability of quality long-term subleases.”
Parker expects the office market to remain strong through early 2019, along with projected job growth. However, growing market volatility will continue to put pressure on the market. “Economic factors such as trade wars, higher interest rates and rising wages may contribute to a slight cooling of the marketplace,” says Parker. “Overall, I expect the Orange County office market to remain strong, with several new developments set to deliver in 2019, including the Irvine Company’s “The Quad” and Lincoln Property Company’s “Flight at Tustin Legacy.” These projects illustrate and support landlord confidence in market demand, especially by larger tenants seeking Class A opportunities. Net absorption and leasing activity both rose from the 3rd to the 4th quarter, another sign that tenant demand should be strong immediately, and continue through 2019.”