News At 1401 & 1375 Dove

Class A Absorption at 11-YEAR High

By: Oliver Fleener

Orange County’s economy has made significant headway over the last five years in terms of economic growth and job creation, following a recession that decimated two of its leading industries: construction and the mortgage business. The Professional & Business Services sector has accounted for nearly 20.9% of the employment gains since the recovery began in 2010, which has largely benefitted the office market. With OC’s total payroll employment levels 24,400 jobs above its pre-recession peak recorded late in 2006, the overall employment picture remains robust. Looking ahead, Orange County is forecasted to create 38,000 new jobs in 2016, according to Moody’s Analytics.

Orange County’s office market fundamentals continued to improve with nearly 1.4 million sq. ft. of direct net absorption in 2015 and over 7.6 million sq. ft. absorbed since the end of the Great Recession. The Class A market posted strong occupancy gains totaling 258,653 sq. ft. during the fourth quarter, pushing the yearly total to nearly 1.3 million sq. ft. - its largest annual absorption gain since 2004. As a result, Class A direct vacancy rates have fallen by 260 basis points to 12.0% over the past 12 months, reaching its lowest level since 2007. However, the Class B sector suffered a loss with 255,062 sq. ft. of negative direct absorption during the quarter and only 89,228 sq. ft. of annual absorption gains, pushing the sector’s direct vacancy rate up 10 basis points to 11.6% in 2015. Countywide, Class A full-service gross asking rents increased on average by 8.0% to $2.56 per sq. ft. since year-end 2014, with the largest annual rent hikes occurring in the Airport Area (11.3%), South (10.9%) and North (7.3%) submarkets. Class B rents also appreciated on average nearly 8.2% to $2.11 per sq. ft. within the past 12 months. As tenant improvement costs continue to escalate, the Orange County office market can expect to see higher rental rates coupled with longer lease terms in 2016.

Orange County has recently experienced notable lease transactions such as Bank of America Merrill Lynch committing to 88,330 sq. ft. of space at 520 Newport Center Drive, with plans to occupy in early 2016. In addition, Emulex Corporation renewed their 50,000 sq. ft. lease at Home Ranch Development – Emulex Building C and Advantage Sales and Marketing renewed their 48,468 sq. ft. lease at Irvine Towers during the quarter. Looking ahead, leasing activity is expected to steadily improve as most office space users have maxed out their current space and staff and will need to expand on both fronts as they continue to grow. However, as the office market continues to tighten, tenant decisions will need to be made quicker and with fewer concessions. ""