Q2 2012 Orange County, California Office Market Trends

CRE Resources

View our Orange County, California Submarket Map

Q2 2012 Orange County, California Office Market Trends

Professional observers of this market provide a mix of reviews—from stagnation to various degrees of progress. While none see a robust recovery, none report the market backsliding into contraction. Among the reviews, Reis’ is among the more notably positive—strong net absorption through the past three quarters, declining vacancy (although the rate remains elevated), and the return of positive rent growth (although the gains have been small and unsteady). It seems abundantly clear, in any case, that the market is not currently strong enough to support a new cycle of speculative development. No competitive general purpose projects were under construction per the date of this report; even build-to-suit activity is minimal. Nor is a dramatic positive turn expected for the near term. In the words of a second quarter report on the local market by Jones Lang LaSalle, “[W]hen comparing the current [economic] recovery to past ones historically, the county is regaining jobs at [less than] half the rate [that] would be considered a strong recovery.”


The recession, coming at the tail end of an active construction cycle and striking hard at the county’s large mortgage industry tenant base, propelled the vacancy rate skyward. Not until third quarter 2010 did it peak—at 21.0%, the highest rate recorded by Reis for this market since 1991 (when Southern California had taken a top spot in the national recession then underway). With the market slowly gathering strength and construction coming to a virtual halt, a gradual descent has been underway. Vacancy ended the latest quarter at 19.3%, down 40 basis points for the period, down 110 year-over-year. The rate should be running below 19.0% by year’s end as progress continues. The latest rate in this 82.2-million-square-foot market, meanwhile, represents 15.9 million square feet of vacant stock. Of this total, 11.0% (about 1.75 million square feet), same as the national rate, were classified as sublease availability.

As a result of the market’s recent struggles, landlord concessions in Class A properties have drawn some number of lower-tier users to the higher quality spaces in what typically is described as “flight to quality.” While high at 20.7%, second quarter Class A vacancy was down 170 basis points from a year earlier. The Class B/C rate, while lower at 18.0%, was down just 40 points over the same time span. “The market for blocks of high-quality space is the only segment that can be characterized as tight,” notes Studley, Inc. “Companies looking for blocks of 50,000 square feet or more can still pick and choose from about 30 different buildings, but only about 10 properties are offering blocks in excess of 100,000 square feet.”


Three years of disastrous net absorption only alleviated at the end of 2010 (the third year of the drought) were followed by noteworthy positive activity. The three-year body count, however, was high at negative 8.5 million square feet, an overall loss that will not soon be redeemed. Still, the market is taking the right steps in the right direction. A total of 819,000 square feet of positive net absorption in 2011 were followed by 393,000 square feet during the first half of 2012—all accompanied by the negligible delivery of only 20,000 square feet of new competitive supply (in the third quarter last year). The net absorption total for second quarter 2012 alone was 254,000 square feet. Reis expects additional positive activity for the remainder of the year. Accordingly, notes JLL in a second quarter Orange County report, “Although total leasing volume remains lower than where it was a year ago, large tenant requirements are emerging around the market” even as small tenants “slowly begin to be more active.” Demand, in addition, may have spread from its traditional office-using sources. Thus, notes Studley, Inc. the market and economy have “gained some support from companies linked to imports and exports”—for the moment, at any rate. A 49,000-square-foot lease by Mitsubishi is a cited case in point (see Submarkets).

With much of the county’s leasing activity consisting of renewals, leasing within the market tends to be lateral, with few new entrants. Thus, notes Studley, Inc. “The market has lost some of its fluidity as fewer relocations happen and more tenants are opting for renewals.” This source reports only two leases larger than 50,000 square feet executed county-wide during the second quarter (one of which was for flex space). Developers, accordingly, are not yet ready to pull the trigger on new speculative projects. No buildings of that type had completed year-to-date in 2012 and none was under construction or scheduled to break ground as of mid-August. Indeed, current construction consists solely of a build-to-suit for PIMCO in Newport Beach (due on line in 2014), an owner-occupied facility for Extron Electronics in Anaheim and a small medical-office facility in South County (see Submarkets for information on particular projects and significant submarkets).

The slow but steady progress of the market is belied to some extent by the currents of competition that lie just below the statistical surface as rental concessions in the Class A market attract some number of lower-tier tenants. “With rental rates sill low compared to pre-recession levels,” states Jones Lang LaSalle, “it is likely that the majority of absorption will land in the discounted Class A availabilities.” States Cushman & Wakefield, “The turnaround of demand since mid-2010 appears to be driven by tenants taking advantage of low rents to expand operations and trade up to higher-quality properties.” Reis’ data add weight to these observations. Net absorption of Class A space over the past year and a half was counted by the firm at 897,000 square feet. The Class B/C sector claimed only 315,000 square feet over the same span.


Three years of precipitous losses in average rents—14.4% and 25.0% overall for the asking and effective averages over the three-year span ending with 2010—were followed by the return of growth. As in occupancy, however, all the losses suffered by rents will not soon be redeemed. Progress, however, is palpable. “Some landlords,” according to a report by Jones Lang LaSalle cited by GlobeSt.com in August, “have already demonstrated confidence in the future recovery by being firmer on negotiations and, in some cases, pushing asking rents for the more desirable availabilities. From a landlord’s perspective, the market is on an encouraging pace of recovery. From a tenant’s perspective, the window of opportunity to lock in market low rates is still open, but quickly closing as vacancies tighten.” Still, noted Jones Lang LaSalle is a second quarter report, “Leverage is still in the hands of the tenant.”

At $26.84 psf and $20.12 psf as reported by Reis, mean asking and effective rates for second quarter 2012 were each up 0.4% since year-end following growth rates of 1.0% and 1.4% in 2011. While no increases were recorded for the latest quarter alone, growth rates for the year as a whole are projected at 1.3% and 1.4%. Even by the end of its five-year forecast period, however, the losses suffered from 2008 through 2010 will not yet be recuperated, according to the latest analysis. At $30.27 psf, the second quarter Class A asking average was down a penny from the quarter before but was up 0.5% since year-end. The mean Class B/C asking rate, at $23.30 psf, was unchanged for the period.