OC office sales may be picking up in Q2. A joint venture between an undisclosed global investment management firm and Hines recently acquired $144 million in financing for Intersect, a four-building, mid-rise, Class-A office campus totaling 452,203 square feet in Irvine, California. | Courtesy HFF

Is OC Office in Trouble?

Carrie Rossenfeld Office

During the first quarter of the year, Orange County’s overall availability rate jumped by 110 basis points to 19.9 percent, and overall quarterly leasing activity leasing dropped from 2.2 million square feet to 1.4 million square feet, falling well short of the long-term quarterly average of 2.1 million square feet, according to a report by Savills Studley, a commercial real estate services firm specializing in tenant representation. The quarterly report is an in-depth compilation of office leasing statistics and trends, major transactions, submarket comparisons, employment data, and investment and development activity.

“A decrease in the number of larger leases, new product coming on line and increased space efficiency by tenants has boosted availability in the last several months,” says Matt Wiley, corporate managing director for Savills Studley.

Orange County tenants have leased 7.8 million square feet in the four most recent quarters, according to the firm. Meanwhile, the class-A availability rate increased by 180 basis points to 21 percent, while class -B and -C availability jumped merely 20 basis points to 18.6 percent.

In addition, sales are down in the OC market. Office-property sales during the trailing six months through February 2018 totaled $1.1 billion, a 25.7 percent decline compared to the previous six-month total of $1.5 billion.

These fundamentals seem to run counter to rental rates in the market. The overall average asking rent jumped to $34.30, a year-on-year increase of 9.7 percent. Class-A rent also spiked, rising by 13.2 percent year-on-year to $38.16. SoCal Real Estate was unable to reach Savills Studley before deadline to discuss the reasons for the apparent dichotomy

Meanwhile, San Diego’s office market and economy are continuing on a steady growth path, according to another Q1 report from Savills Studley. “Leasing has not been off the charts, but with one of the most restrained development pipelines in the nation and sustained demand from healthcare, biopharm and software firms, larger tenants seeking quality blocks of space in prime locations face challenging conditions,” Savills Studley Research reports.

San Diego office leasing did decrease during the quarter, even though the availability rate declined, the report states. Tenants have leased 4.7 million square feet in the four most recent quarters, well below the long-term average of 6.6 million square feet, and down by 2.1 percent from the last quarter of 2017, totaling 4.8 million square feet. The region’s overall availability rate dipped by 60 basis points to 14.8 percent, with the class-A rate falling by 10 basis points, starting the year at 16.7 percent. Overall and class-A rates both fell by approximately 200 basis points year-on-year.

Overall asking rent in San Diego inched up by 0.2 percent from the prior quarter, rising to $2.74 per square foot per month ($32.93 per square foot annually). Rent has fallen by 3.3 percent year-on-year, though. Still, San Diego office-property sales during the trailing six months through February 2018 totaled $1.5 billion, a 75 percent increase compared to the previous six-month total of $877 million.