The office market in Orange County held up in the second quarter. According to a new report from JLL, the local office vacancy rate remained flat at 13.9% and asking rents remained flat at $3.11 per square foot. Absorption rates also remained flat but negative at -381,042 square feet. The market performance was better than most expected, but also a sign that the worst could still be yet to come.
"The market doesn't react very fast," Jeff Ingham, senior managing director at JLL, tells GlobeSt.com. "There was some negative net absorption and rental rates remained flat, but it wasn't crazy negative. It wasn't nearly as bad as it was in 2008. That doesn't mean that it isn't going to change in the future, but the reality is that it is too early to tell. We are in the first inning of this, and it is still too early to know where it is going to go."
Looking at rents, Ingham said the market typically needs to see a change in tenant behavior and activity before a change in rental rates, and that takes times. "Rental rates are still pretty flat, but to see a rental rate change, the market needs to test the availability and tenant requirements," he says. "It needs to be competitive for rental rates to really drop. Rental rates are based on asking prices, and there is quite a bit of new construction. New construction is going to be at a higher price. As things shape up, the market will act and react based on the competition and demand."
In addition, the negative net absorption—especially paired with a flat vacancy rate—is more than likely attributable to stalled move-ins rather than a change in leasing activity. "Negative net absorption is being exacerbated by the way that we track absorption, which is based on when tenants occupy space," says Ingham. "We have had tenants moving out of space, but new tenants that we going to occupy a new space haven't moved in yet. So, there is a lag that has occurred where tenants have signed new leases but they haven't taken occupancy either because there has been a lag in construction or because everyone is working from home so there isn't a rush to move in."
On significant change was the increase in sub lease space. The Orange County market has seen a significant increase in new sublease space, mostly in the Airport Area and South County submarkets. This is almost entirely due to tech companies placing space on the market. "We have had more than 300,000 square feet of sublease space come back to the market since March. 80% of that is technology space," says Ingham. "Stock market growth is really being fueled by growing technology companies, and the technology companies that we are working with are not as worried about the economy as other companies."
The increase in sublease space could ultimately increase competition among landlords and serve to drive down rates, but like Ingham said, it is still too early to tell.
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Kelsi Maree Borland
