The Orange County Office Market Ebbs, Flows
By Bob Caudill, Vice-Director President, Necklaces
We continue to see a flight of tenants into low-rise office buildings, typically four stories or less, and out of high-rise buildings. This trend started before the pandemic, but COVID has undoubtedly accelerated its movement.
Market asking rates have stabilized, while concessions such as free rent, advantageous occupancy and improvement allowances have increased. Soaring construction costs continue, putting pressure on the rental economics. In addition, delays in the delivery of building materials impacted the completion of leasehold improvements.
We will continue to see tough times for short-term office owners as tenants don’t know how much space they need in the future. More and more tenants will also struggle to pay their rent on time. In the long term, while some industries have learned that they can remain thriving with most of their employees working remotely, others are experiencing negative impacts on creativity and collaboration. As a result, their businesses have suffered financially and they will demand that their employees return to the office.
Activity and impact
Irvine’s Spectrum Terrace has set a new standard in design and quality for low-rise Class A office buildings. The tenants in this project are creating a work environment that employees will want to return to, including more welcoming office spaces and common areas that provide outdoor workspace, amenities and fitness.
Southern Orange County, specifically the Spectrum area, is currently seeing the most activity. The region’s “work, play, live” design attracts users from the life sciences, technology and automotive industries. Those looking for low rise options will see limited opportunities. In contrast, those wishing to lease space in high-rise buildings will see aggressive concessions, including reduced parking fees, to stay competitive with low-rise buildings.
Incentives and demand
Although the market continues to tilt heavily in favor of tenants in many respects with respect to the economy and available concessions, high quality options are still limited and demand will outweigh supply throughout the county. .
Most submarkets are heading towards the highest vacancy rates we have seen in the past 15 years. The county is now approaching a 17% vacancy rate in markets adjacent to the airport. Central Orange County vacancy rates are north of 20% because their base area has many more high-rise buildings.
Tenant improvement allowances reached historic highs, primarily due to unprecedented increases in construction costs. Free rent and advantageous occupancy are approaching early 2000 concession formulas, with more than one to two months free rent per lease year now being the norm. Moving allowances to the tenant and commission bonuses to his broker are also returning to the market.