Orange County’s Office Market Has a Shot at Optimism

by Jeff Shaw

— By Mike Adams, managing director, office investor services, Stream Realty Partners —

The Orange County office market, like many others, is undergoing significant shifts as tenants reassess their office space needs in the wake of the ongoing transition to hybrid work models. Despite persisting challenges, recent developments suggest certain market segments are showing signs of recovery. This, naturally, sparks optimism that the worst of the downturn could be behind us.

A key indicator of this positive shift is the noteworthy net absorption of 231,744 square feet, marking the first positive trend since the second quarter of 2022. Orange County’s Airport area has emerged as a leader in this office recovery, witnessing move-ins totaling 204,376 square feet. While the overall market grapples with challenges, such as a slight increase in the unemployment rate and mixed performance in office-using sector jobs, there are pockets of improvement, especially in the Class A segment.

This positive absorption has contributed to a 10-basis-point decline in the total vacancy rate quarter over quarter, dropping from 18.7 percent to 18.6 percent. However, when viewed year over year, the increase from 16.4 percent highlights the enduring impact of recent economic challenges. The current vacancy rate remains notably above the 10-year average of 13.5 percent despite this positive trend. It’s worth noting that during the financial crisis in 2010, vacancy peaked at 19.2 percent.

Leasing activity, a critical factor in the market’s turnaround, also continues to move at a slow pace. Landlords, in response, are offering enticing concessions to attract tenants. The upcoming year is expected to witness a surge in leasing activities as a result of these offerings, playing a significant role in reshaping the overall market dynamics.

Market fundamentals, however, continue to exert downward pressure on property values. The challenging landscape has created a silver lining, with growing interest in Class A assets at discounted prices. This increased attention is setting the stage for favorable leasing terms in the near future. While the market is not without its challenges, the early signs of certain segments beginning to turn around suggest a gradual recovery is in the works.

The Orange County office market’s journey toward recovery is underscored by the resilience of the Class A segment and the positive net absorption observed. As leasing activity gains momentum and landlords make strategic concessions, the market is positioned for a more optimistic outlook. Uncertainties persist, but the current landscape offers opportunities for both landlords and tenants to navigate the evolving dynamics of this optimistic market.

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