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Mid-Year Orange County Office Update

CoStar Market Insights: Most Key Indicators Have Slowed in 2018
July 9, 2018
Aeiral image of Broadcom’s new campus in Irvine, CA.

Leasing activity in multi-tenant office buildings in Orange County has yet to rebound from 2017.

This past year marked the first time since 2010 that net absorption in multi-tenant properties failed to notch a positive number. In fact, every year from 2011 to 2016 posted net absorption above 1 million square feet in this cohort.

Through the first half of 2018, a near-equal balance of negative absorption among direct and sublet offerings continues the trend begun last year in multi-tenant buildings. That number over the past six months is negative 730,000 square feet.

While overall net absorption remained positive at 650,000 square feet in 2017, it was largely on the back of single-tenant buildings and several build-to-suits brought to market that propped up that number.

In fact, last year, CoStar recorded the lowest overall net absorption in Orange County since 2010 and it was the first year to fall below one million square feet since then. That trend has carried over into the first half of 2018, with net absorption totaling more than negative 1 million square feet in Orange County’s entire office product.

Speculative space now accounts for the majority of space under construction in Orange County. Of the 1 million square feet under construction, only 40 percent of it is pre-leased. But that number is deceiving as some of the largest commitments were signed after construction was underway.

At The Irvine Co.’s Quad at Discovery Business Center, Vyaire Medical signed on to take two of the four buildings and 180,000 square feet after ground breaking. And at 2722 Michelson, Anduril signed the first half’s largest lease when it committed take the entire property. The defense company will move into the new 155,000 square foot creative office building once LBA Realty finishes the conversion from a warehouse.

The annual rent growth rate has also slowed down. Gross rents in Orange County grew 5 percent in 2017. Through the first half of 2018, gross rents have grown only by 1.1 percent and have yet to reach the prerecession peak. The second quarter of 2018, though, marked the 23rd straight quarter of positive rent growth for Orange County office space, the most consecutive quarters of positive rent growth since CoStar began tracking Orange County.

As more space comes to market, and speculative construction picks up, annual rent growth is falling toward the historical average of 2.8 percent. At 3.4 percent, annual rent growth is the lowest it has been since early 2013.

Sales volume in 2017 exceeded 2016’s level by about 15 percent, clocking in at $3.05 billion, even as turnover was largely unchanged. This year started off strong after the sale of City Tower for $147 million in March. That pushed first quarter volume about 30 percent above the same quarter in 2017. But even with the $150 million sale of four buildings in the Summit Office Campus in May, Orange County just barely kept pace with 2017’s first half volume (which posted the most volume in a second quarter this cycle).

Average pricing, though, has taken a hit. On completed transactions, the average sales price is $240 per square foot. This compares to $287 per square foot on average in 2017.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

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