— By Brian C. Childs, Executive Managing Director, NAI Capital Commercial —
Orange County office has historically been last in and first out of any recession or economic setback. That trend continues as an office recovery is in sight in this post-COVID marketplace.
The challenge of encouraging workers to return to the office post-pandemic has slowed considerably. The rate of space being vacated in Orange County’s office market slowed to less than a 1 percent increase quarter over quarter in vacant space in the second quarter of 2023. This is compared to the 17 percent year-over-year rise, resulting in a total of 20.9 million square feet of vacant office space. Similarly, the growth rate of available sublease space also experienced a slower pace of 0.2 percent quarter over quarter, compared to a 23.4 percent year-over-year increase, reaching 4.6 million square feet. The second-quarter office vacancy rate sits at 13.3 percent, versus 13.2 percent in the first quarter. Overall office vacancy was at 11.5 percent a year ago.
As the availability of office space has begun to stabilize, the average asking rent remained unchanged compared to the previous quarter. There was a minor decline of 2.2 percent year over year, resulting in an average rent of $2.67 per square foot on a full-service gross basis. The weak rent growth, coupled with low demand for office space, had a significant impact on the amount of space under construction. With no new construction taking place, year-over-year construction experienced a sharp drop of 77.5 percent, remaining at 285,361 square feet in the second quarter.
Trends to Watch
Orange County witnessed a notable decrease in the vacancy rate for newly constructed office buildings in the second quarter. This occurred as the flight to new, amenity-rich, low-rise office campuses intensified. Irvine Company assets like Spectrum Terrace and Innovation Office Park continue to outperform traditional second-generation office projects. The vacancy rate dropped by more than 6.2 percentage points quarter over quarter, reaching 24.9 percent. Although the level of vacant space in these new office buildings remains more than double compared to a year ago, occupancy is expected to gradually improve due to a preference for low-rise campus environments with increased tenant amenities. The average asking rent for new construction remained unchanged for the previous three quarters, but declined by 24.5 percent compared to the second quarter of 2020. It reached $3.94 per square foot on a full-service gross monthly basis. Tech-oriented submarkets like the Irvine Spectrum saw the most net absorption in the county. Current notable leases include: Axonics (119,000 square feet), Apple (115,000 square feet) and Western Growers (32,000 square feet).
When comparing different building types, low- and mid-rise office buildings (six stories or fewer) experienced a marginal decline of 0.1 precent in the vacancy rate, while high-rise buildings (seven stories or higher) witnessed a 4.1 percent increase in the vacancy rate from the prior quarter. The vacancy rate for low-mid-rise buildings stood at 11.5 percent, indicating 14 million square feet of vacant space, whereas high-rise buildings had a larger vacancy rate of 20.1 percent, totaling 6.7 million square feet. Rent for low-mid-rise buildings remained stable at $2.63 per square foot, while high-rise buildings experienced a 3.4 percent increase, reaching $3.04 per square foot.
An emerging trend in the stabilization of the Orange County office market is the reduction of the overall Orange County office base, which currently sits at 157 million square feet. This contraction is due to the recent conversion of office projects to industrial, residential and medical properties. An example would be the recent sale of the 197,000-square-foot Elevate office project in Santa Ana. The eight-acre property is being demolished and redeveloped into a 163,000-square-foot industrial project called Harbor Logistics Center. This trend will continue into 2024 with numerous office project conversions currently in the works.