Office Leasing Velocity Grows, But Falls Short

Leasing velocity picked up in the second quarter in Orange County—but it didn’t hit the historical quarterly average. According to a report from Savills Studley, office leasing grew from 1.4 million square feet in the first quarter to 1.9 million square feet in the second quarter, but fell short of the long-term quarterly average of 2.1 million square feet. The activity was enough to push down the vacancy rate by 230 points to 18.3%, while class-A product fell by 200 basis points to 19.9%

“The tech and FIRE—Financial, Insurance and Real Estate—industries are driving leasing velocity throughout the Orange County marketplace,” Brad Schmitt managing director of Savills Studley’s Orange County office, tells GlobeSt.com. “Tech led the way with two meaningful transactions in the second quarter totaling nearly 250,000 square feet. Anduril, a new defense tech start up, leased 155,000 at LBA’s creative office conversion at 2722 Michelson Drive, which was the former home of St. John’s Knits. Additionally, Acorns, a fintech company who previously occupied roughly 34,000 square feet at Newport Gateway in the Airport area nearly tripled their space by signing a 91,000 square feet lease with the Irvine Company at University Research Park. Finally, co-working operators WeWork and Spaces continued their aggressive expansion in Orange County, which has added fuel to an already hot market.”

While leasing activity is picking up, there are still large blocks of space available in the market and a relatively high vacancy rate. However, Schmitt says that the supply is an issue of quality space, with limited availability of quality product. “Quality big blocks of space are becoming increasingly difficult to come by for large tenants,” says Schmitt. “Although there are 40 full floors available in the Airport, there are only a handful of contiguous big blocks of space if you are a 50,000 square foot tenant. Competition is, and will continue to be, fierce for the larger blocks of quality space.”

This cycle, a more diverse group of companies has emerged in the market, and that has helped to create more stability for the long term.  “The great news for the Orange County office market is that we have seen a very diverse tenant mix driving activity during this cycle,” says Schmitt. “Tech and other sub-industries, such as cybersecurity, are leading the charge as opposed to the mortgage and financial service firms that led the way in the past. It really is a healthy mix of industries, which is encouraging for OC.”

While leasing volumes are increasing, investment sales activity is trending down. According to the report, investment sales in the first half of the year fell 31%, to total $561 million. By comparison, investment office sales in the last half of 2017 totaled $817 million. “This decline has more to do with supply than demand. Institutional capital continues to be very interested in Orange County but the reality is that many of the value-add players have already sold during this cycle,” explains Schmitt. “We anticipate the investment sales volume to gather steam during the second half of 2018.”

Leasing volume is also expected to gain momentum in the second half of the year, thanks to strong job growth. “With unemployment in Orange County at 3%, and the economy firing on all cylinders, we anticipate steady leasing velocity through the end of the year,” says Schmitt. “There are several large deals in play in new projects such as Boardwalk, and in recently repositioned projects such as the MET, that will boost the market.”