Office Market Stagnant According to Orange County Studley Report
Orange County, Calif. (March 10, 2014)  

The Orange County office market continued to lose momentum through the final quarter of 2013 as regional hiring slowed and market dynamics became less fluid. According to the Orange County Studley Report, Studley’s analysis of office market conditions in the region, leasing volume declined to 7.1 million square feet in 2013—nearly 20 percent less that the long-term historical market average—from 9.1 million square feet in 2011 (the highest level since 2005) and 7.6 million square feet in 2012.

“While leasing velocity has slowed significantly, tenants seeking large, contiguous blocks of space are finding options limited, particularly in select submarkets such as Newport Center and Irvine Spectrum,” said Royce Sharf, executive vice president and branch manager of Studley’s Orange County office. “As a result, an increasing percentage of major tenants are opting for renewals, although a build-to-suit or preemptive strike to backfill a “to be vacated” property in a proposed development could be a rewarding opportunity for the right user.”

New construction activity minimal

New construction activity remains restrained, with nearly all projects underway being build-to-suits or medical office product. As of year-end 2013, Orange County had only 1.4 million square feet under construction, with 94 percent of it pre-leased. The lack of new construction and the flight to quality that took place early in 2013 has contributed to a decline in available space. The overall availability rate fell by 0.3 percentage points to 15.5 percent at year end and has decreased by 1.6 percentage points year-over-year. The Class A rate dipped by 2.3 percentage points year-over-year to 20.4 percent, its lowest point since the third quarter of 2007, but still well above the 10.5 percent availability rate recorded year-end 2005.

Asking rents inch higher

Owners of the highly desirable Class A properties have started to increase asking rents and owners of all classes of properties have pulled back on concessions. As a result, overall asking rents increased in the fourth quarter to $23.46 per square foot, rising 2.1 percent as compared to the previous quarter. Class A asking rents rose as well, increasing by 2.2 percent to $24.48.

Diversity defines market activity

A diverse mix of tenants signed leases in the fourth quarter, including those in the media, tech, financial, healthcare, and residential real estate sectors. One growing trend impacting many industry sectors is the interest in “non-traditional” or “creative” space. With employees being asked to do more and employers trying to address sustainability and productivity for their employees, office space functionality, design, and layout is changing. These trends are noticeable within all industries including consultants, professional services firms and even law firms who historically have had a traditional viewpoint as to how office space is used.

Market outlook

A healthier housing market and still churning mortgage banking industry continues to contribute to the stabilization of the Orange County office market. All eyes are on these two leading indicators to see if they soften. The region is still lagging most major metros in terms of office-using employment.

“Despite some ongoing uncertainty in the market, there’s a scarcity of large blocks of quality space in select submarkets,” noted Sharf. “Tenants with these particular requirements will need to start their space search well in advance of lease expiration and consider alternative strategies and opportunities. Companies with requirements in the 10,000 to 15,000-square-foot range will still have a deep pool of space to choose from, and therefore considerable negotiating power, but should still expect a moderate pullback in concessions and a higher overall effective rental rate.”

About Studley

Studley is the leading global commercial real estate services firm specializing in tenant representation. Founded in 1954, Studley pioneered the conflict-free business model of representing only tenants in their commercial real estate transactions. With over 60 offices worldwide, Studley offers expert advisory services, including brokerage, project management, corporate services and strategic portfolio solutions. Studley’s unique approach examines every client’s business to fully understand corporate objectives and optimize real estate assets. For more information, please visit www.studley.com and follow us on Twitter @StudleyInc and LinkedIn.