Office Leasing Picture Continues to Brighten

IRVINE, CA—The continuing recovery of Orange County's office market is obvious if one studies the fundamentals, including rising lease rates and new tenant types moving to the region. Orange County landlords are now able to raise their rental rates, and medical and insurance tenants are relocating here, experts tell GlobeSt.com.

One of the most noteworthy trends is that the market is finally seeing lease-rate appreciation, says Kurt Strasmann, senior managing director for CBRE. “This is best evidenced by the Irvine Co., which jumped up the rates and has been very successful with its Fashion Island office property. There is tenant demand, we're chipping away at the vacancy rates, and there's a lot of nicer product getting leased up faster. Coupled with businesses starting to expand and take more space, this shows confidence in the market.”

In addition to steady tenant demand and absorption, Strasmann says some owners are contemplating spec development in the county, which is something we “haven't seen in eons. There are two or three others in addition to the Irvine Co.'s Spectrum property, and obviously investment for office has been strong.”

Value-add office properties have seen a large amount of investment interest, Strasmann says. “Investors are also very attracted to class-A product, which is the most in demand. It's 5-cap or sub-5 cap on the office side, especially with the anticipation of rent growth for the next three to five years. Orange County is one of the most highly sought-after markets in the nation due to the growing economy, strong expected rent growth and positive job growth. Every metric is moving in the right direction, both on office and industrial. We're bullish on Orange County; we think we have a good three- or four-year run on this thing.”

Tenantwise, CBRE reports the healthcare sector led the Orange County office market on its continued recovery and expansion during the third quarter, guiding the region to 447,000 square feet of positive net absorption. While healthcare is not new to the region, this quarter's positive showing was particularly significant since the county posted positive gains for the third straight quarter and for 17 of the past 18 quarters.

Although lease rates have increased 5.7% year-over-year, Orange County remains an attractive, lower-cost alternative to neighboring Los Angeles and San Diego counties, CBRE also reports. Development has started to pick up, although most projects have been build-to-suits. PIMCO and Hyundai both moved into built-to-suit projects this year, making up approximately 850,000 square feet of new product delivered this year. Another 109,000-square-foot project was delivered this quarter in Irvine, bringing the year-to-date completion total to 1.4 million square feet. Healthy demand continues to take shape in Orange County development, according to CBRE, demonstrating confidence form landlords and developers. At the end of the third quarter, there was 387,000 square feet of additional office space under construction, 20% of which is preleased.

On the job front, the county has been able to add 17,900 jobs year-over-year as of Q3 despite seasonal layoffs in the local government and education sectors this summer, Jones Lang LaSalle reports. With an unemployment rate of 5.4% as of Q3, unemployment continues to compress at a faster pace than California and the US.

In addition, year-over-year rent growth driven by diminishing vacancy is at its highest level since 2007, Jones Lang LaSalle says, and a majority of the leasing activity stemmed from medical and insurance firms relocating to Irvine or Irvine Spectrum. According to the firm, of the total net absorption activity that occurred this quarter, more than half of occupancy gains were derived from deals of 10,000 square feet and larger.