OC Office Market To Continue Outpacing Other SoCal Markets
A Q4 market report released last week by Newmark Grubb Knight Frank (NGKF) puts Orange County (OC) office space at the top for the SoCal region, with vacancy at just 10.9%. This is the lowest office vacancy in the region, with San Diego, LA and Inland Empire vacancy ranging between 14% and 15%.
Bisnow caught up with NGKF regional director of research Tim Van Noord to find out what’s driving OC’s performance. “Strong job growth,” he tells us, noting vacancy rates across all five OC submarkets is below 12% and there’s very little sublet space available. OC experienced a 2.5% year-over-year increase in non-farm job growth through November, and Chapman University forecasts another 2.5% employment gain this year, which would add about 39,000 jobs, bringing total jobs to 1.6 million.
Tim, who authored the report, says another reason OC is predicted to fare well in 2016 is that supply fundamentals are strong, as developers are exhibiting more discipline and patience this time around. The amount of space under construction represents just 0.5% of existing inventory, which is very low compared to other West Coast markets like San Francisco, Seattle, Phoenix and Los Angeles. Office construction in San Francisco, for instance is 4.9%. The previous two expansion periods saw OC construction reach 5.3% in 2001 and 4.6% in 2006.
Three projects are expected to break ground this year: Cornerstone I in Tustin (760k SF), and Irvine Co’s Quad at Discovery (317k SF) and Sand Canyon Business Center (104k SF), both of which are in Irvine. This could send construction to 1.8% of inventory, which is still low compared to previous cycles.
But in the meantime, the office market remains tight and may get even tighter before new product comes on line. “There are only three blocks of existing space with at least 200k SF or more,” he tells us, “and it’s rumored that a large user coming from LA is taking 600k to 800k SF."
"While this is good for landlords, it’s not for tenants,” Tim adds. Overall average asking rents increased 12.2% year-over-year to $2.30/SF gross. Class-A rents ended the year at $2.66/SF and Class-B rents rose to $2.13/SF. Top-performing submarkets are the John Wayne Airport with Class-A rents averaging $2.83/SF, which he says stands to reason since it saw the most demand in 2015, and Park Oaks in Newport Beach with an average rent of $3.90/SF. Irvine and Anaheim also saw strong occupancy gains in 2015 giving way to rising rents. He notes that some landlords in these markets are asking north of $5/SF.
According to Tim, OC’s office was ranked sixth highest nationally for Class-A rental growth for the past two years. It’s diverse mix of office users, ranging from tech, biotech and education to finance, insurance and legal firms, making this a safe haven for investors, because it’s more sustainable in a downturn. As a result, there’s a lot of investor interest and a ton of capital chasing yields, he notes, which is driving up values. Cap rates fell to an average of 5.9%, 50 basis points lower than the 2014 average and similar to the 2007 average.
The report predicts healthy labor market progress will aid growth in office occupancy, and OC’s leasing market will likely continue its trend of robust expansion throughout 2016, based on leases signed this year and tenants in the market. “Orange County’s enviable economic fundamentals and quality of life remain compelling draws for both employees and companies that seek to hire them,” Tim concludes.