Second Quarter 2025
Office Leasing Pulls Back Mid-Year as Vacancy Rises in Orange County
Office demand weakened further with negative net absorption and declining leasing activity, as employers adjusted space needs in response to higher costs and shifting labor market conditions.
Employers remain cautious as leasing lags and vacancy rises, driven by higher costs, job losses, and hybrid work uncertainty.
MARKET OVERVIEW
During the second quarter of 2025, the Orange County office market experienced a modest 0.3% decline in occupied space quarter-over-quarter. This contributed to a 10-basis-point year-over-year increase in the vacancy rate, which rose to 12.8%, totaling 20 million square feet of vacant office space.
Office construction activity jumped 44.5% from a year ago, driven in part by The Weave at OCVIBE, a $4 billion mixed-use development rising near the Honda Center in Anaheim. The Weave includes a six-story, 168,137-square-foot office building currently under construction, with no preleasing announced yet.
The ongoing shift between remote work, return-to-office efforts, and tenant downsizing contributed to another quarter of negative net absorption, totaling 612,707 square feet through the first half of the year. While sublease activity supported positive net absorption for the second consecutive quarter, it wasn’t enough to offset overall losses from direct space being vacated.
Vacant sublease space declined 9.7% quarter-over-quarter and 16.6% year-over-year, falling to 1.7 million square feet. Although still 62.7% above pre-pandemic levels (Q2 2020), the trend is moving in a positive direction, as more space is being leased than added to the market.
Despite the ongoing challenge of achieving a full post-pandemic return to the office, landlords are actively working to improve occupancy. Concessions such as discounted rents, free rent periods, and flexible lease terms remain common to attract tenants.
The average asking rent held steady quarter-over-quarter at $2.81 per square foot (full-service gross), rising just 2 cents year-over-year. Still, leasing activity during the first half of the year declined 21.1% compared to the same period in 2024, reflecting continued soft tenant demand.
TRENDS TO WATCH
In the second quarter of 2025, direct leasing activity for office space in Orange County slowed compared to the first half of 2024. Tenants leased 3.7 million square feet on a direct basis, representing a 20.4% decrease from the same period last year. The result was a negative net absorption of 748,424 square feet of direct space, compared to a positive net absorption of 70,990 square feet during the same period in 2024.
Office demand in Orange County will likely remain sensitive to labor market conditions, corporate earnings, and the pace of return-to-office initiatives. According to the California Labor Market Information Division, the unemployment rate rose to 4.5 percent in June, up from 4.1 percent a year earlier. Job losses in office-occupying sectors contributed to the slowdown. Employment in Finance and Insurance declined by 2.4 percent, while Real Estate jobs fell by 2.2 percent.
Employers, a key driver of office use, are expected to remain cautious in their real estate decisions. Elevated occupancy costs, coupled with the Federal Reserve’s recent decision to keep interest rates higher for longer, are making financing more expensive for tenants and dampening leasing activity.
The decline in net absorption was driven by continued tenant downsizing, non-renewals, and consolidations, as companies reassessed their space needs in response to hybrid work trends and broader economic uncertainty. Move-outs from previously occupied space outpaced new leasing, particularly among larger tenants adjusting their footprints.
Looking ahead, tenants are expected to continue seeking flexibility, shorter lease terms, and reduced footprints, especially in higher-cost submarkets. While new construction is underway, including speculative projects, the lack of preleasing may contribute to elevated vacancy in the near term. Leasing activity may begin to stabilize as economic conditions improve, and companies gain greater clarity on long-term workplace strategies
