O.C. First Quarter 2016 – Office Market

Ken Ward Economy

Orange County’s Vacancy Increases to 10.1%
Net Absorption Negative (129,670) SF in the Quarter

The Orange County Office market ended the first quarter 2016 with a vacancy rate of 10.1%. The vacancy rate was up over the previous quarter, with net absorption totaling negative (129,670) square feet in the first quarter. Vacant sublease space increased in the quarter, ending the quarter at 564,600 square feet. Rental rates ended the first quarter at $27.17, an increase over the previous quarter. A total of eight buildings delivered to the market in the quarter totaling 755,144 square feet, with 3,038,215 square feet still under construction at the end of the quarter.

Absorption
Net absorption for the overall Orange County office market was negative (129,670) square feet in the first quarter 2016. That compares to positive 145,212 square feet in the fourth quarter 2015, positive 552,383 square feet in the third quarter 2015, and positive 448,604 square feet in the second quarter 2015.

Tenants moving into large blocks of space in 2016 include: Bank of America Merrill Lynch moving into 105,960 square feet at 520 Newport Center Dr; Pacific Union Bank moving into 65,162 square feet at Pacific Arts III; and Loan Depot moving into 52,850 square feet at Pacific Vista – Bldg E.

The Class-A office market recorded net absorption of negative (417,357) square feet in the first quarter 2016, compared to positive 169,186 square feet in the fourth quarter 2015, positive 232,190 in the third quarter 2015, and positive 319,301 in the second quarter 2015.

The Class-B office market recorded net absorption of positive 298,337 square feet in the first quarter 2016, compared to negative (87,773) square feet in the fourth quarter 2015, positive 319,235 in the third quarter 2015, and positive 104,699 in the second quarter 2015. The Class-C office market recorded net absorption of negative (10,650) square feet in the first quarter 2016 compared to positive 63,799 square feet in the fourth quarter 2015, positive 958 in the third quarter 2015, and positive 24,604 in the second quarter 2015.

Vacancy
The office vacancy rate in the Orange County market area increased to 10.1% at the end of the first quarter 2016. The vacancy rate was 9.6% at the end of the fourth quarter 2015, 9.7% at the end of the third quarter 2015, and 10.0% at the end of the second quarter 2015.

Class-A projects reported a vacancy rate of 14.0% at the end of the first quarter 2016, 12.1% at the end of the fourth quarter 2015, 12.5% at the end of the third quarter 2015, and 12.9% at the end of the second quarter 2015.

Class-B projects reported a vacancy rate of 9.4% at the end of the first quarter 2016, 9.5% at the end of the fourth quarter 2015, 9.4% at the end of the third quarter 2015, and 9.8% at the end of the second quarter 2015.

Class-C projects reported a vacancy rate of 4.9% at the end of the first quarter 2016, 4.9% at the end of fourth quarter 2015, 5.1% at the end of the third quarter 2015, and 5.3% at the end of the second quarter 2015.

Largest Lease Signings
The largest lease signings occurring in 2016 included: the 190,000-square-foot lease signed by Volt Information Sciences, Inc. at 2401 N Glassell St in the Central County market; the 121,120-square-foot deal signed by Travis Mathew at 15202 Graham St in the West County market; and the 98,902-square-foot lease signed by Mazda at 200 Spectrum Center Dr in the South County market.

Rental Rates
The average quoted asking rental rate for available office space, all classes, was $27.17 per square foot per year at the end of the first quarter 2016 in the Orange County market area. This represented a 2.7% increase in quoted rental rates from the end of the fourth quarter 2015, when rents were reported at $26.45 per square foot.

The average quoted rate within the Class-A sector was $31.31 at the end of the first quarter 2016, while Class-B rates stood at $25.89, and Class-C rates at $20.97. At the end of the fourth quarter 2015, Class-A rates were $30.26 per square foot, Class-B rates were $25.46, and Class-C rates were $20.65.

Deliveries and Construction
During the first quarter 2016, eight buildings totaling 755,144 square feet were completed in the Orange County market area. This compares to 0 buildings that were completed in the fourth quarter 2015, three buildings totaling 55,631 square feet completed in the third quarter 2015, and 27,767 square feet in two buildings completed in the second quarter 2015.

There were 3,038,215 square feet of office space under construction at the end of the first quarter 2016. Some of the notable 2016 deliveries include: 200 Spectrum Center Dr, a 425,044-square-foot facility that delivered in first quarter 2016 and is now 44% occupied, and 15771 Red Hill Ave, a 96,865-square-foot building that delivered in first quarter 2016 and is now 0% occupied.

The largest projects underway at the end of first quarter 2016 were The Press, a 700,000-square-foot conversion from industrial to office with 0% of its space pre-leased, and The Boardwalk, a 537,224-squarefoot facility that is 0% preleased.

Inventory
Total office inventory in the Orange County market area amounted to 154,229,255 square feet in 6,065 buildings as of the end of the first quarter 2016. The Class-A office sector consisted of 45,903,048 square feet in 283 projects. There were 2,976 Class-B buildings totaling 86,071,755 square feet, and the Class-C sector consisted of 22,254,452 square feet in 2,806 buildings. Within the Office market there were 457 owner occupied buildings accounting for 15,172,846 square feet of office space.

Sales Activity
Tallying office building sales of 15,000 square feet or larger, Orange County (California) office sales figures rose during the fourth quarter 2015 in terms of dollar volume compared to the third quarter of 2015.

In the fourth quarter, 31 office transactions closed with a total volume of $688,592,500. The 31 buildings totaled 2,703,881 square feet and the average price per square foot equated to $254.67 per square foot. That compares to 28 transactions totaling $565,157,250 in the third quarter 2015. The total square footage in the third quarter was 2,372,564 square feet for an average price per square foot of $238.21.

Total office building sales activity in 2015 was up compared to 2014. In the twelve months of 2015, the market saw 102 office sales transactions with a total volume of $1,972,120,000. The price per square foot averaged $233.67. In the same twelve months of 2014, the market posted 86 transactions with a total volume of $1,643,264,899. The price per square foot averaged $198.99.

Cap rates have been lower in 2015, averaging 5.68% compared to the same period in 2014 when they averaged 5.95%.

One of the largest transactions that has occurred within the last four quarters in the Orange County (California) market is the sale of 18201 Von Karman Ave. in Irvine. This 226,105-square-foot office building sold for $82,500,000, or $364.87 per square foot. The property sold on 11/19/2015, at a 3.6% cap rate.