As the year approaches its close, Orange County’s office market presents a microcosm of the broader national trends shaping the commercial real estate sector. Despite a challenging economic environment, the market has seen some activity, both in terms of leases and sales, as detailed in the “Orange County Office Mid-Quarter Report – November 2023” by Cushman & Wakefield. However, the activity is not showing signs of market trends improving, predicting perhaps that 2024 may be another difficult year for the sector, in general.
Year-to-date (YTD), the county has witnessed 5.1 million square feet in new leases across 1,233 transactions. Notable among these are the lease renewals by The Regents of the University of California for 63,750 square feet and Avery Products Corporation taking 51,387 square feet, alongside significant new leases by Morgan & Morgan and an undisclosed tenant with Granite Properties.
Direct leasing accounted for 85 percent (89 percent in 2022) and sublease for 15 percent (vs. 11 percent in 2022) 2023 YTD
However, the vacancy rate in Orange County offices has risen to 19.7 percent, with an availability rate of 23.4 percent. Vacancy rates have been consistently climbing, showing a notable increase of 930 basis points since the first quarter of 2020. This upward trend is largely due to the impact of work-from-home policies and the adoption of hybrid work schedules, which have significantly altered the demand for office spaces. Despite these changes in occupancy, the overall asking rent has remained relatively stable since the start of 2020, with the current average standing at $2.85 per square foot, full service gross.
The trend of increasing sublease space is becoming more pronounced, as a growing number of tenants return their office spaces to the market. This shift is largely attributed to the adoption of work-from-home policies, the integration of hybrid working models, and the effects of a weakening economy. The peak in sublease availability was seen in the second quarter of 2023, with the current figure reaching 3.8 million square feet as of mid-November 2023.
Despite current market conditions, Orange County is looking ahead with several noteworthy proposed projects, although there is little indication that these will break ground soon. These include the Innovation Office Park Phase III, a 532,000-square-foot development in Irvine Spectrum owned by Irvine Company. In addition, Lincoln Property Company is proposing 525,000 square feet of space in its FLIGHT @ Tustin Legacy Phase II development, while Irvine Company is also looking to add another 511,516 square feet at its Academy Point project. Retail development company Merlone Geier Partners is in the works to deliver 465,000 square feet at its Five Lagunas project in Laguna Hills/Aliso Viejo, while the Samueli Family is proposing 150,000 square feet in The Weave @ ocV!BE project in the Stadium Area.
The Orange County office market, as of November 2023, is a study in contrasts. On one hand, there is some leasing and sales activity, and on the other, increasing vacancy rates and a rising tide of sublease spaces portend a prolonged status quo exacerbated by the work-from-home trends, which are severely impacting occupancy of commercial spaces. These trends echo the broader national situation, where the office real estate market continues to adjust to post-pandemic realities and a changing economic landscape.
