Which SoCal Market Leads Office Absorption?

NEWPORT BEACH, CA—Net office absorption in OC is outperforming that of every other market in the region, with 42% of the absorption in SoCal taking place here over the last three years, CBRE's senior managing director Kurt Strasmann tells GlobeSt.com exclusively. In addition, the Orange County industrial market increased average asking lease rates for both manufacturing/warehouse and R&D space at the end of Q1. We spoke with Strasmann about both sectors and what we can expect to see moving forward.

GlobeSt.com: What's most compelling to you about the office-market report?

Strasmann: There's a phenomenal trend happening: net absorption in Orange County is outperforming every other market in Southern California in so many ways. The best example is, CBRE tracks 420 million square feet of office product in Southern California, and Orange County represents about 100 million square feet of that product—24% of the inventory. Yet net absorption for the last three years in Orange County was another million square feet. That's 42% of the entire net absorption in Southern California. That tells you how strong this market is and how strong business expansion has been in Orange County.

Also, which is not yet reflected as much in the data, office rents are starting to move really fast. It's happening now, in real time. I think you'll see a healthy 10% increase this year. We speak across the board with most major landlords, and class-A rents are rising.

So those are two really great stories, coupled with the third component: job growth. We added 50,000 jobs in Orange County over the last 12 months, from February 2014 to February 2015. In the month of February, Orange County added 14,600 jobs. I didn't believe it at first. These were added in three primary sectors: government, professional and business services and leisure and hospitality. These are our three strongest sectors. Job growth is the number-one factor leading to business expansion, lower vacancy and higher prices.

We're finally seeing all the fundamentals taking shape and resulting in much higher lease rates in high-quality product. New developments are close to being announced within the next few months, and it's a great example of how people feel about the market.

GlobeSt.com: Aside from the ever-strong Airport area, are there any emerging office markets in Orange County?

Strasmann: The majority of the market share of the inventory is in the Airport area and South County. Other areas are strong, too, but those are the most high-profile and most active and for the most part have the highest-quality product. About 70 million square feet of the 101 million square feet of office product in Orange County is in those two markets. South County has the lowest direct vacancy, followed by the Airport area.

GlobeSt.com: Let's shift to talking about the industrial sector. What has been responsible for the increasing industrial rents in 2015 in Orange County?

Strasmann: There are two reasons for this: first, the economy has recovered in both small-business America and big business. Second, job-growth numbers are a steady trend. Also, industrial was never overbuilt in Orange County. Vacancies never got too high—we have the second-lowest vacancy in the nation out of the 54 markets we track, behind L.A. Vacancy rates have been very low for a long time, they're under 2.7%, and even at the peak the sector was never overbuilt.

Industrial rents were high in the first quarter at $.78 per square foot. They dipped down to $.57 per square foot, and now they're at $.70 per square foot. They're at about 90% of where we were at the peak, so there's room to grow, but it's a slow and steady climb.

Fundamentals were never out of whack for industrial and even for office. We're poised to have more than 6% rent growth, 6.4% industrial average rent growth over the next five years, so it's pretty healthy. That takes us past the peak in rents sometime next year.

Also, buildings are for sale—small buildings for sale to users—those prices have moved dramatically, and we're going to continue to see those prices move dramatically and even surpass peak shortly. There's limited to no inventory of buildings for sale under 50,000 square feet, and this size has really taken off over the last 12 months because interest rates have been very low and because of the sever limitation of available supply of buildings for sale. Prices have taken off strongly, coupled with confidence. We're also seeing true expansion. People are looking to take on additional space in anticipation of future expansion, which is a great sign.

GlobeSt.com: What's happening with investment?

Strasmann: On the investor side, there is similarly a lack of supply and tremendous demand from institutional investors to get into Orange County, both on the office and industrial sides. And now we're adding foreign investors, specifically Asian. These are huge drivers in the capital markets. There's cap-rate compression and talk of interest rates rising, but we feel the demand for capital is so strong coming into our markets that we don't think rising interest rates will affect sales much.