Tenants See Value In Class A Space

Orange County’s office market opened the year with continued healthy demand for Class A space.

 The continuing trend is well-timed for developers of 14 buildings totaling more than 1.3 million sq. ft. that are being completed in South County, Central County and in the Airport market.

 In the last eight quarters, 13 buildings totaling 2.7 million sq. ft. have been added to the Class A inventory with absorption averaging about 183,000 sq. ft. per quarter.

 Some of the demand for Class A buildings has come at the expense of second-tier space, which has averaged 124,101 sq. ft. of negative absorption over the same two-year span.
The shift toward Class A space has been incentivized by favorable lease rates. Year-over-year average asking rents are up 3% for Class A and 5.5% for Class B space.  Consequently, after assessing the narrow gap between Class A and Class B rents, currently at $3 and $2.64 per sq. ft. respectively, most tenants are finding the value offered by premium space to be irresistible. 

 This also underscores the most unique economic aspect of the Orange County office market.  For decades the market has been under the strong influence of the Irvine Company. Because the pre-eminent landowner’s extensive South County property holdings are virtually debt-free, the company easily can afford to develop buildings entirely on spec and negotiate rents as it sees fit.  This forces other office developers to price their rental space aggressively in order to compete for the same users.

 Compared to an average pre-lease rate of 63.9% among all major U.S. metropolitan office markets, Orange County’s rate of pre-leased space in buildings underway is 9.1%, the lowest in the nation.  Among California’s other five leading office markets the pre-lease rate for new office construction is 55.7% for Los Angeles, 65.5% for East Bay/Oakland, 77% for San Francisco, 96.3% for Sacramento and 96.5% for San Diego.

 Although first-quarter demand countywide for premium space was positive, demand for all available space has been uneven. 

 The Airport market posted 326,877 sq. ft. positive absorption in the first quarter.  This follows 499,321 sq. ft. of tenant expansion in the last three months of 2018.  Year-over-year rent growth averaged 2.1%.

 North County posted 25,838 sq. ft. of Q1 absorption, its third straight quarter of net growth.  Asking rents gained 5.6% over the same period last year.

 First-quarter demand in the Central County market was 238,321 sq. ft. in the red, the fifth straight quarter of negative absorption. Year-over-year rents gained 8%.

 First-quarter demand in South County, which includes the Irvine Spectrum office district, totaled a modest 20,134 sq. ft.  But that followed 838,050 sq. ft. of tenant growth in 2018.

 West County saw 4,772 sq. ft. of Q1 tenant contraction, its third straight quarter of negative absorption. Rents gained 4.3% year over year.

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