Office Recovery Slows in Orange County in Q1

The office market recovery has slowed in Orange County—but by all metrics, the sector has continued to perform. According to the first quarter report from JLL, the office market availability rate and vacancy rate continued to decrease, down 3% and 1% respectively for the quarter, and rents in the market increased 1.5%.

Small box office deals of less than 10,000 square feet drove leasing activity. These deals accounted for 61% of all office leases in the quarter, which the report says illustrates a preference for smaller spaces as some companies shrink their footprint in the wake of the pandemic. When measured by square foot, overall leasing activity was down for the quarter, but in terms of lease deals signed, activity was up 10%. Looking at activity by submarket, the Airport Area was the leader. Total absorption in the Airport Area turned positive for the first time in two years with more than 238,000 square feet of class-B space was absorbed in the first quarter.

There were some market challenges. While rents overall increased 1.5% to $2.81 per square foot for the quarter, effective rents actually fell due to increased concessions from landlords. In particular TI allowances increased 25%. Overall, net absorption was a negative 96,832 square feet for the quarter and the total market vacancy rate was 16.2%.

Office conversion projects are helping to take some obsolete office supply off of the market. In the first quarter, there were 15 ongoing office-to-industrial conversion projects. Most of these properties will be used for last mile logistics.

These office conversion projects are rapidly growing, with two new ones added to the list just in the last month. Overall, there are several projects throughout Southern California. They have become a way to rebalance real estate use as demand has shifted in favor of industrial properties and away from office space. Orange County is home to the most of these projects in Southern California, according to earlier research from JLL. At the time of that earlier research, there were 12 projects set to deliver 160,000 square feet of industrial space to the market, helping to ease the record low 1.3% vacancy rate, although only adding a small fraction of space to the total supply. That pipeline has since grown.