O.C. Second Quarter 2016 – Office Market

Ken Ward Economy

Orange County’s Vacancy Decreases to 9.6%
Net Absorption Positive 645,428 SF in the Quarter

The Orange County Office market ended the second quarter 2016 with a vacancy rate of 9.6%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 645,428 square feet in the second quarter. Vacant sublease space decreased in the quarter, ending the quarter at 549,875 square feet. Rental rates ended the second quarter at $27.61, an increase over the previous quarter. A total of one building delivered to the market in the quarter totaling 6,000 square feet, with 2,438,411 square feet still under construction at the end of the quarter.

Absorption
Net absorption for the overall Orange County office market was positive 645,428 square feet in the second quarter 2016. That compares to negative (93,864) square feet in the first quarter 2016, positive 151,141 square feet in the fourth quarter 2015, and positive 386,552 square feet in the third 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; Western Growers moving into 80,888 square feet at 15525 Sand Canyon Ave; and Pacific Union Bank moving into 65,162 square feet at 675 Anton Blvd.

The Class-A office market recorded net absorption of positive 160,527 square feet in the second quarter 2016, compared to negative (212,519) square feet in the first quarter 2016, positive 157,986 in the fourth quarter 2015, and positive 152,689 in the third quarter 2015.

The Class-B office market recorded net absorption of positive 469,998 square feet in the second quarter 2016, compared to positive 137,105 square feet in the first quarter 2016, negative (71,370) in the fourth quarter 2015, and positive 243,009 in the third quarter 2015.

The Class-C office market recorded net absorption of positive 14,903 square feet in the second quarter 2016 compared to negative (18,450) square feet in the first quarter 2016, positive 64,525 in the fourth quarter 2015, and negative (9,146) in the third quarter 2015.

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

Class-A projects reported a vacancy rate of 13.1% at the end of the second quarter 2016, 13.4% at the end of the first quarter 2016, 12.0% at the end of the fourth quarter 2015, and 12.3% at the end of the third quarter 2015.
Class-B projects reported a vacancy rate of 9.1% at the end of the second quarter 2016, 9.6% at the end of the first quarter 2016, 9.6% at the end of the fourth quarter 2015, and 9.5% at the end of the third quarter 2015. Class-C projects reported a vacancy rate of 4.7% at the end of the second quarter 2016, 4.8% at the end of first quarter 2016, 4.7% at the end of the fourth quarter 2015, and 5.0% at the end of the third 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 116,548-square-foot deal signed by CalTrans at 1750 E 4th St in the Central County market; and the 104,605-square-foot lease signed by A2Z Development Center Orange County at 40 Pacifica in the South County market.

Rental Rates
The average quoted asking rental rate for available office space, all classes, was $27.61 per square foot per year at the end of the second quarter 2016 in the Orange County market area. This represented a 1.5% increase in quoted rental rates from the end of the first quarter 2016, when rents were reported at $27.19 per square foot.

The average quoted rate within the Class-A sector was $32.32 at the end of the second quarter 2016, while Class-B rates stood at $26.26, and Class-C rates at $21.51. At the end of the first quarter 2016, Class-A rates were $31.45 per square foot, Class-B rates were $25.87, and Class-C rates were $20.96.

Deliveries and Construction
During the second quarter 2016, one building totaling 6,000 square feet were completed in the Orange County market area. This compares to eight buildings totaling 755,144 square feet that were completed in the first quarter 2016, nothing completed in the fourth quarter 2015, and 53,332 square feet in three buildings completed in the third quarter 2015.

There were 2,218,411 square feet of office space under construction at the end of the second 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 55% occupied, and The Source Tower, a 73,035-square-foot building that delivered in first quarter 2016 and is now 13% occupied.

The largest projects underway at the end of second quarter 2016 were The Boardwalk, a 537,224-square-foot building with 0% of its space pre-leased, and 400 Spectrum Center Dr, a 466,696-square-foot facility that is 8% pre-leased.

Inventory
Total office inventory in the Orange County market area amounted to 153,977,203 square feet in 6,063 buildings as of the end of the second quarter 2016. The Class-A office sector consisted of 45,617,194 square feet in 282 projects. There were 2,976 Class-B buildings totaling 86,053,084 square feet, and the Class-C sector consisted of 22,306,925 square feet in 2,805 buildings. Within the Office market there were 458 owner-occupied buildings accounting for 15,016,835 square feet of office space.

Sales Activity
Tallying office building sales of 15,000 square feet or larger, Orange County (California) office sales figures fell during the first quarter 2016 in terms of dollar volume compared to the fourth quarter of 2015.

In the first quarter, 27 office transactions closed with a total volume of $373,630,000. The 27 buildings totaled 1,942,398 square feet and the average price per square foot equated to $192.36 per square foot. That compares to 30 transactions totaling $687,942,500 in the fourth quarter 2015. The total square footage in the fourth quarter was 2,686,842 square feet for an average price per square foot of $256.04.

Total office building sales activity in 2016 was up compared to 2015. In the first three months of 2016, the market saw 27 office sales transactions with a total volume of $373,630,000. The price per square foot averaged $192.36. In the same first three months of 2015, the market posted 19 transactions with a total volume of $329,302,750. The price per square foot averaged $208.73.

Cap rates have been lower in 2016, averaging 5.74% compared to the same period in 2015 when they averaged 6.38%.

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 231,109-square-foot office building sold for $82,500,000, or $356.97 per square foot. The property sold on 11/19/2015, at a 3.6% cap rate.