The Orange County average office asking lease rate increased $0.02 to $2.90 per square foot per month in the first quarter as supply constraints supported steady demand, according to CBRE. Asking rates surpassed the previous peak by 4.3 percent and are at the highest point ever in Orange County.
The year started with 24,919 square feet of negative net absorption as many companies reevaluated needs and focused on utilizing space more efficiently as leases expired, the report says. Reduced footprints and relocations were the contributing factors to the quarterly negative net absorption.
On the other hand, according to the Bureau of Labor Statistics’ producer price index, the tight construction labor market and 2.5 percent year-over-year increase in new construction costs caused concession packages to reach record levels in the OC office market. Occupiers pressured landlords to underwrite the recent spike in material and labor costs and received larger tenant-improvement packages than in previous years, CBRE reports.
Technology’s impact on the way occupiers operate impacted office demand in this market during Q1, the report continues. Increased cloud-storage ability, open offices and hybrid offices removed the need for space eaters like file cabinets, offices, and cubicles. Companies focused on optimizing current floor plans and reducing footprints.
Also, buyers purchased office product and focused on renovations and rehabilitations. Investors looked to add value and increase demand and asking rates by implementing minor facelifts to create a more attractive and modern office or major restorations to revamp older spaces, CBRE reports. The top three deals totaled $224 million and were all renovation/rehabilitation opportunities for investors that planned to spend substantially to meet occupier needs.
Notwithstanding negative net absorption, positive investor sentiment put upward pressure on rents with new and renovated projects that appeal to the region’s diverse tenant mix, led by business services, technology, and insurance, says CBRE. There were 1 million square feet under construction, with no new starts or completions. Regus pre-leased 47,000 square feet at The Quad, bringing the campus to 63 percent occupancy upon completion, and Flight remained unleased, but activity is expected to pick up as the project moves along.