The Orange County office market is making a rebound, with the third quarter of 2021 marking the most leasing activity recorded throughout the year. According to an Orange County third quarter office market report from CBRE, the region reported positive net absorption of 112,680 square feet, with highly amenitized office buildings being the most coveted by tenants and investors alike.
The report showed that tenants are beginning to take up more space in the region, with vacancy rates decreasing for the first time since the fourth quarter of 2020. While still relatively high at 12.3 percent, overall office vacancy in Orange County decreased 70 basis points from the previous quarter. At the same time, however, average rental rates dropped slightly by $0.01 quarter-over-quarter to $2.94 per square foot per month.
“Leasing activity is better than last year but certainly not near pre-pandemic levels. In many cases, occupiers are simply renewing short term until they have a better direction going forward. Much will depend on when larger occupiers require or strongly encourage their employees to return to the office,” Kurt Strasmann, executive managing director for CBRE’s Newport Beach office, said.
Higher leasing activity comes as Orange County’s unemployment rate has also decreased to 5.9 percent, according to the report. While slightly higher than the national 5.3 percent unemployment rate, Orange County remains lower than the statewide unemployment rate, which remains at 7.5 percent.
“The war on talent has never been more intense. We see a lot of openings at many of our region’s companies. The difficulty is matching the skill set with the right opportunity,” Strasmann said.
According to CBRE, tenants are primarily occupying space in move-in ready or high-amenity vacancies. The report showed that employees are more likely to want to return to recently renovated office buildings with surface parking and onsite amenities, including dining, fitness centers, flex-space conference rooms and more.
For instance, Terran Orbital, a satellite design and manufacturing company leased four floors totaling 89,000 square feet at the highly amenitized 400 Spectrum Center in Irvine, with plans to add 400 additional employees. Bandai Namco also relocated from Santa Clara to occupy the newly built Source H2O building in Irvine Spectrum. The Japanese video game publisher is leasing the entire building, which totals 69,647 square feet.
“There is a flight to quality regarding on-site amenities as well as the quality of the asset. Properties with superior amenities have seen the bulk of activity,” Strasmann Said.
He continued, “The Irvine Spectrum has been the most active submarket. Many of the assets there are newer and have the amenity package that attract and cater to today’s occupiers.”
Overall, South Orange County, where Irvine Spectrum is located, ended the quarter with a 11.1 percent vacancy, slightly below the market’s average. Average leasing rates in South Orange County also decreased by $0.07 quarter-over-quarter to $2.90 per square foot per month, which is the lowest recorded figure since the second quarter of 2017. North Orange County, however, saw rates increase $0.09 quarter-over-quarter to $2.63 per square foot, while vacancy rates remained relatively low at 6.4 percent.
Overall, the Orange County office market is getting back on track, with many amenity-rich properties seeing a large bulk of the activity. With employment growth also expected to remain above three percent through 2022, CBRE anticipates renewed interest in the region’s office market.
Resurging interest in Orange County’s office market was reflected in many large transactions that took place over the quarter as well. According to the report, in the third quarter of 2021, transaction volume reached $809.6 million. The largest sale of the quarter was Skyline Group International’s purchase of the 273,180 square-foot 1 & 3 Glen Bell Way building in Irvine Spectrum for $159 million, or $582 per square foot. The 435,177 square-foot City Tower in Orange also sold to Opal Holdings for $150.5 million, or $346 per square foot.
“Orange County is well positioned relative to many other markets. We have a diverse business infrastructure, terrific lifestyle options for employees, a skilled labor pool and high-quality office assets,” Strasmann said.