Spec, New Development Continue in Orange County’s Office Sector

The Orange County office market continues to remain healthy with an unemployment rate of 2.6 percent in the second quarter of 2018. This is down from 3.2 percent 12 months prior. The driving industry sectors for Orange County that occupy a large portion of office space include financial services, information technology, logistics and healthcare.

Chris Smith, Avison Young

We are currently seeing vacancy rates around 11.7 percent, which is about a 10 basis point increase from the second quarter of this year. The main reason for this increase has been momentum in completed construction projects with more than 2.2 million square feet that has been delivered over the past 12 months. At the mid-year point of 2018, more than 808,000 square feet of office space was under construction — the majority of which was speculative.

The largest office projects under construction right now include Flight at Tustin Legacy in Tustin and the Quad at Discovery Business Center in Irvine Spectrum. There are four Class A, institutional-quality office projects currently under construction in the county that total nearly 1.3 million square feet — 75 percent of which is pre-leased to tenants. All this bodes well for the continued confidence in the Orange County market.

We are still seeing good momentum in sales transactions despite interest rates going up. According to the Avison Young’s fall 2018 commercial real estate investment review, the county is on track to achieve sales volumes similar to those of 2017, indicating that record-high volumes will likely continue for a fourth consecutive year. Total sales volume in the first half of 2018 approached $3.2 billion, decreasing a mere 6 percent from the first half of 2017. The largest Orange County commercial real estate sales in 2018 have come from the office sector with Summit Office Campus in Aliso Viejo selling for $157 million and ($326 per square foot) in March, and City Tower in Orange selling this summer for just over $147 million ($342 psf).

For smaller, single-tenant office product, there have been more sale-leasebacks than in the past. Owner-users are looking to cash in on their property appreciation and many look to reinvest capital back into their business as it continues to grow.

Ultimately, Orange County is seeing more new institutional-quality inventory, slowly rising rental rates, continued investor interest and an all-around healthy economic environment. The quality of life, population density and educated workforce are all key fundamentals businesses look for when choosing to expand, relocate and remain here. We anticipate that trend to continue over the coming years.

— By Chris Smith, senior associate, Avison Young. This article first appeared in the December 2018 issue of Western Real Estate Business magazine. 

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