New Deliveries Stagnate Vacancy Rates

The office vacancy rate remained relatively flat in the second quarter, decreasing only 30 basis points to 11.3%—according to a new report from Cushman & Wakefield. While the vacancy rate barely nudged, leasing activity and absorption was strong and rental rates continued to rise. The stagnant vacancy rate is likely due to new office product that came to market during the quarter.

“Absorption remains positive and healthy, but not overly strong. Orange County closed out the second quarter of 2018 with overall vacancy declining to 11.3%, while direct vacancy also decreased 20 bps to 10.7% quarter-over-quarter,” Eric Kenas, market director of research at Cushman & Wakefield, tells GlobeSt.com. “We had 143,000 square feet more this quarter, with the first quarter posting 130,000 square feet bringing year-to-date to 272,000 square feet. This is down from 827,000 square feet from a year ago. A lot of absorption has been offset by 786,768 square feet of new deliveries to the market.”

Net absorption increased slightly with South Orange County leading the activity, according to the report. “Overall net absorption was slightly positive for the quarter at 143,072 square feet. For the second consecutive quarter, South County led Orange County with 63,265 square feet of positive absorption,” explains Kenas. “The majority of the absorption is accounted for by multiple tenants moving into 400 Spectrum and Mavenlink moving into 32,000 square feet at 6501 Irvine Center. The Greater Airport Area experienced positive absorption for the first time in a year with 41,906 square feet.”

Even as net absorption has trended down, office rental rates, however, surged for the quarter, up to $2.86 from $2.46 at the same time last year. “Vacancy went down both in direct and overall. Not dramatically, but have been trending back to a year ago prior to the first wave of new developments hitting the market,” says Mark Williams, research analyst at Cushman & Wakefield. “The elevation in rental rates can be accredited to the delivery of several high quality office buildings—400 Spectrum, The Boardwalk, and the Five Point campus in Irvine Spectrum. Overall asking rents increased $.02 quarter-over-quarter, averaging $2.86 per square foot per month, per square foot. Class-A direct rent increased $0.07 from the quarter prior, averaging $3.34, while class-B rents averaged $2.43.”

Overall, the leasing activity is healthy, and it is a theme that Kenas and Williams expect to continue through the end of the year. “We believe the year will close out very healthy. Considering all the space of University Research Park (URP), there is 600,000-plus square feet, there has been a ton of activity there and that is also in the GAA,” says Kenas. “With new product available, it is attracting good tenants. The Boardwalk and later this year the Quad will continues to be attractive to tenants in the market. Orange County asking rents have risen significantly over the last 2 years as a result of the delivery of multiple Class A developments and positive market conditions. Spectrum Terrace, a planned 1.1 million square feet Irvine Company office park, is scheduled to begin Phase I construction later this year with 360,000 sf. This development could put more upward pressure on office rents going into 2019, specifically in Irvine Spectrum.”