O.C. Third Quarter 2016 – Office Market

Ken Ward Economy

Orange County’s Vacancy Decreases to 8.9%
Net Absorption Positive 626,900 SF in the Quarter

The Orange County Office market ended the third quarter 2016 with a vacancy rate of 8.9%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 626,900 square feet in the third quarter. Vacant sublease space decreased in the quarter, ending the quarter at 460,206 square feet. Rental rates ended the third quarter at $27.73, an increase over the previous quarter. A total of one building delivered to the market in the quarter totaling 5,000 square feet, with 2,430,157 square feet still under construction at the end of the quarter.

Absorption
Net absorption for the overall Orange County office market was positive 626,900 square feet in the third quarter 2016. That compares to positive 730,844 square feet in the second quarter 2016, negative (15,044) square feet in the first quarter 2016, and positive 167,933 square feet in the fourth quarter 2015.

Tenants moving into large blocks of space in 2016 include: CalTrans moving into 116,548 square feet at 1750 E 4th St; Bank of America Merrill Lynch moving into 105,960 square feet at 520 Newport Center Dr; and Rockwell Collins moving into 99,263 square feet at 1833 Alton Pky.

The Class-A office market recorded net absorption of positive 322,962 square feet in the third quarter 2016, compared to positive 158,609 square feet in the second quarter 2016, negative (163,408) in the first quarter 2016, and positive 179,054 in the fourth quarter 2015.

The Class-B office market recorded net absorption of positive 243,287 square feet in the third quarter 2016, compared to positive 556,337 square feet in the second quarter 2016, positive 165,714 in the first quarter 2016, and negative (71,330) in the fourth quarter 2015.

The Class-C office market recorded net absorption of positive 60,651 square feet in the third quarter 2016 compared to positive 15,898 square feet in the second quarter 2016, negative (17,350) in the first quarter 2016, and positive 60,209 in the fourth quarter 2015.

Vacancy
The office vacancy rate in the Orange County market area decreased to 8.9% at the end of the third quarter 2016. The vacancy rate was 9.4% at the end of the second quarter 2016, 9.9% at the end of the first quarter 2016, and 9.4% at the end of the fourth quarter 2015.

Class-A projects reported a vacancy rate of 11.8% at the end of the third quarter 2016, 12.5% at the end of the second quarter 2016, 12.9% at the end of the first quarter 2016, and 11.5% at the end of the fourth quarter 2015.

Class-B projects reported a vacancy rate of 8.6% at the end of the third quarter 2016, 8.9% at the end of the second quarter 2016, 9.5% at the end of the first quarter 2016, and 9.5% at the end of the fourth quarter 2015.

Class-C projects reported a vacancy rate of 4.4% at the end of the third quarter 2016, 4.7% at the end of second quarter 2016, 4.7% at the end of the first quarter 2016, and 4.7% at the end of the fourth quarter 2015.

Largest Lease Signings
The largest lease signings occurring in 2016 included: the 191,127-square-foot lease signed by Volt Information Sciences, Inc. at 2401 N Glassell St in the Central County market; the 152,828-square-foot deal signed by Nationstar Mortgage Holdings at 1600 E Saint Andrew Pl in the Central County market; and the 116,548-square-foot lease signed by CalTrans at 1750 E 4th St in the Central County market.

Sublease Vacancy
The amount of vacant sublease space in the Orange County market decreased to 460,206 square feet by the end of the third quarter 2016, from 509,703 square feet at the end of the second quarter 2016. There was 546,062 square feet vacant at the end of the first quarter 2016 and 555,300 square feet at the end of the fourth quarter 2015.

Orange County’s Class-A projects reported vacant sub- lease space of 238,549 square feet at the end of third quarter 2016, down from the 332,043 square feet reported at the end of the second quarter 2016. There were 371,831 square feet of sublease space vacant at the end of the first quarter 2016, and 330,815 square feet at the end of the fourth quarter 2015.

Class-B projects reported vacant sublease space of 214,092 square feet at the end of the third quarter 2016, up from the 170,095 square feet reported at the end of the second quarter 2016. At the end of the first quarter 2016 there were 165,190 square feet, and at the end of the fourth quarter 2015 there were 216,520 square feet vacant.

Class-C projects reported no vacant sublease space from the second quarter 2016 to the third quarter 2016. Sublease vacancy went from 7,565 square feet to 7,565 square feet during that time. There was 9,041 square feet at the end of the first quarter 2016, and 7,965 square feet at the end of the fourth quarter 2015.

Rental Rates
The average quoted asking rental rate for available office space, all classes, was $27.73 per square foot per year at the end of the third quarter 2016 in the Orange County market area. This represented a 0.4% increase in quoted rental rates from the end of the second quarter 2016, when rents were reported at $27.61 per square foot.

The average quoted rate within the Class-A sector was $32.89 at the end of the third quarter 2016, while Class-B rates stood at $26.28, and Class-C rates at $21.57. At the end of the second quarter 2016, Class-A rates were $32.32 per square foot, Class-B rates were $26.26, and Class-C rates were $21.49.

Deliveries and Construction
During the third quarter 2016, one building totaling 5,000 square feet were completed in the Orange County market area. This compares to one building totaling 6,000 square feet that were completed in the second quarter 2016, eight buildings totaling 778,109 square feet completed in the first quarter 2016, and nothing completed in the fourth quarter 2015.

There were 2,430,157 square feet of office space under construction at the end of the third 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 78% occupied, and The Source Tower, a 73,035-square-foot building that delivered in first quarter 2016 and is now 22% occupied.

The largest projects underway at the end of third 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 154,039,098 square feet in 6,066 buildings as of the end of the third quarter 2016. The Class-A office sec- tor consisted of 45,773,253 square feet in 283 projects. There were 2,980 Class-B buildings totaling 86,035,465 square feet, and the Class-C sector consisted of 22,230,380 square feet in 2,803 buildings. Within the Office market there were 369 owner-occupied buildings accounting for 9,115,779 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 second quarter 2016 in terms of dollar volume compared to the first quarter of 2016.

In the second quarter, 29 office transactions closed with a total volume of $436,295,400. The 29 buildings totaled 1,619,567 square feet and the average price per square foot equated to $269.39 per square foot. That compares to 27 transactions totaling $373,630,000 in the first quarter 2016. The total square footage in the first quarter was 1,944,884 square feet for an average price per square foot of $192.11.

Total office building sales activity in 2016 was down compared to 2015. In the first six months of 2016, the market saw 56 office sales transactions with a total volume of $809,925,400. The price per square foot averaged $227.22. In the same first six months of 2015, the market posted 44 transactions with a total volume of $826,470,250. The price per square foot aver- aged $226.00.

Cap rates have been lower in 2016, averaging 6.02% com- pared to the same period in 2015 when they averaged 6.06%.

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.