DEMAND IMPROVES BUT DELTA VIRUS BRINGS CAUTION
Office demand resumed in most of the county in the third quarter amid an economy straining to return to pre-pandemic normalcy, but tenants continued to shed blocks of space in the county’s largest market around John Wayne Airport.
Nearly 540,000 SF of Q3 growth was reported in the North, Central and South County markets, which total 64.1 million SF. South County posted 318,539 SF of net absorption, its strongest quarter in more than three years.
But the 43.6-million-SF Airport market, which accounts for 37% of the total county inventory, ended the quarter with an added 433,151 SF in the red. In the last six quarters more than 2 million SF have gone back on the market, pushing up the Airport’s vacancy rate from 11.4% to 16.5%. In the 9.6-million-SF West County market, there were 108,519 SF of Q3 negative absorption.
Countywide net absorption in the third quarter was negative 1,873 SF, a dramatic improvement from the 1.1 million SF of negative absorption in the first half and 2.6-million-SF retreat since Q1 last year.
It was hoped early this year that vaccine distribution would shorten the pandemic and the economy appeared poised for a rapid re-opening. But vaccine resistance plus emergence of the more-infectious Covid-19 Delta variant set off a surge in serious infections. This renewed concerns about employee health, causing some companies to delay office re-opening plans.
The largest Q3 lease was a direct deal for 90,000 SF on Von Karman Avenue in Irvine by health club operator Life Time. Additionally, the third quarter reported the most lease transactions since the lockdown, but three of the five largest deals were for sublease space, which climbed to an all-time high of 1.4% of total inventory. By comparison, vacant available sublease space reached 1.2% of total inventory in 2008, the start of the great recession. Of the 99 largest lease agreements in Q3, 14 were subleases.
In most economic downturns landlords will offer concessions of free rent and increased tenant improvement allowances before cutting lease rates. Additionally, building owners sometimes offer bonuses to procuring brokers. Currently, some landlords are offering brokers up to $4 per SF for delivering new tenants. But building owners also have cut average asking rents nearly 9% for Class A space, which accounts for 42% of total inventory. Overall, average rents have fallen 3.6%.
The largest building sale of the quarter was Opal Holdings’ $150.5-million purchase of the 435,177-SF City Tower in Orange, which translates to $346 per SF. That was followed by the sale of the 181,500-SF Taco Bell World Headquarters in the Irvine Spectrum to Skyline Group for $624 per SF.
FORECAST
The state unemployment rate is projected to average 7.8% in 2021 and 6.4% next year, a marked improvement from last year but still well above the forecasted U.S. average of 5.7% in 2021 and 4.3% in 2022.
