OC Office Lease Negotiations Pause Amid Uncertainty

The office market in Orange County, California, has already started to see some impact from the coronavirus pandemic, which hit in March. According to a new report from JLL, some lease negotiations were paused or canceled in the first quarter amid uncertainty.

“We have seen a wide spectrum of responses when it comes to lease negotiations,” Jared Dienstag, research manager at JLL, tells GlobeSt.com. “Some leases are getting executed, some tenants are electing to put their negotiations on hold until normal business and economic activity resumes, other occupiers have chosen to sign one-year extensions, and there are companies that have halted their deals. Tenants with near term lease commencement dates, from previously signed deals, are working with landlords in postponing lease start dates due to the stay-at-home order, and any construction slowdowns that are impacting their ability to occupy their space.”

In addition, the quarter closed with negative net absorption of 146,519 square feet and an increased vacancy rate of 13.6%. However, Dienstag says that the negative absorption is unrelated to the pandemic. “Because net absorption is based on when tenants physically move-in and move-out of spaces, there was not enough time for changes in lease negotiations, which gained traction in mid-March once stay-at-home orders were implemented, to have impacted quarter one net absorption,” he says. “With that said, the market did not have any truly significant move-outs causing negative absorption or a dominant submarket in this regard. However, the class-B segment was primarily responsible for the negative absorption as it recorded -349,154 square feet, while class-A experienced positive absorption of 202,635 square feet. The occupancy losses stemmed from small and mid-size tenants.”

So far, it is too early to tell if there is or will be a pattern in terms of impacted office areas, whether property type or geographic area. “Professional and business services with the ability for a large share of employees to operate remotely, has allowed it to be somewhat more resilient,” says Dienstag. “Their concentrations and locations within the market will impact the level of disruption. Also, it will be important to monitor co-working operators and the properties where they lease space. Co-working occupies 1.7 million square feet in Orange County, however, this accounts for only 1.7 percent of the total office inventory, with 70 percent of co-working space located in the Airport Area submarket.”

However, Orange County may be more prepared than ever before to weather an economic storm. Today, the local economy is more diversified than it was in past recessions.  “We can look back at the financial crisis to truly understand the importance of having a diversified economy,” explains. “The recession due to the financial crisis hit the country hard, however, Orange County was among the hardest hit markets because of its overexposure to the financial services industry, in particular mortgage companies. Because of the high concentration of mortgage firms in Orange County, the local office market was significantly impacted. For comparison purposes, the overall US office market saw rents fall 13.9% and took 30 quarters for rents to recover, while Orange County rents dropped 31.5% and took 39 quarters to rebound. Overexposure to an industry puts a market in a riskier position.”

This round, the local market looks a lot different. “Not only has Orange County total nonfarm employment grown nine percent since the financial crisis, it has diversified significantly,” says Dienstag. “Healthcare and life sciences are two sectors that have experienced significant growth in Orange County, and both are witnessing strong demand in response to COVID-19.”