Third Quarter 2024
Positive Shifts in Orange County Office Market as Leasing Activity Gains Momentum
Sublease Space Declines, and Smaller Properties Drive Sales as Market Adjusts
This upward momentum suggests the market is approaching a trough.
MARKET OVERVIEW
During the third quarter of 2024, the Orange County office market demonstrated stability, with occupied office space increasing by 30,203 square feet quarter over quarter. This modest growth kept the vacancy rate at 12.6%, reflecting a 100-basis point rise year-over-year. The market recorded 19.7 million square feet of vacant office space.
The gradual transition from remote work to in-office arrangements supported another quarter of positive net absorption, totaling approximately 900,000 square feet year-to-date. Subleasing continued to play a critical role, contributing to positive net absorption for the fourth consecutive quarter. While available sublease space increased slightly by 1.1% quarter over quarter, it declined significantly year-over-year, falling 13.2% to 3.5 million square feet. On a direct basis, office space availability remains 22.4% higher than pre-pandemic levels (Q2 2020). Nevertheless, the market is trending positively as leasing activity outpaces new supply additions.
By the end of Q3, the Orange County office market had 25.2 million square feet of available space. Despite lingering challenges in achieving a full post-pandemic return to the office, occupancy rates are gradually improving. The average asking rent rose by 1 cent quarter over quarter to $2.81 per square foot on a full-service gross basis, representing a 2.2% year-over-year increase. Leasing volume climbed 4.3% quarter over quarter and 5.3% year-to-date compared to the same period last year, driven by growing demand and landlord concessions, such as reduced rents, free rent, and flexible lease terms.
Additionally, this positive momentum fueled a 58.8% year-over-year increase in office space under construction, supported by several speculative projects breaking ground during the quarter.
TRENDS TO WATCH
Direct leasing activity for office space in Orange County gained momentum in the third quarter of 2024, as evidenced by a 5.5% increase quarter over quarter. Tenants leased approximately 2.2 million square feet of office space on a direct basis, representing an 11.5% rise compared to the same period in 2023. Year-to-date, direct leasing activity has grown by 2.0%, albeit modestly, a trend that is expected to enable landlords to maintain steady asking rents with confidence moving forward.
Amid a significant supply of available office space, signs of a positive shift are emerging, with tenants increasingly expected to find value in subleasing. With the average asking rent for sublease space at $1.96 per square foot—$0.85 lower than direct space—this trend is likely to provide tenants with valuable opportunities to optimize costs and secure favorable deals in the coming quarters. A decline in vacant sublease space reflects a broader trend of stabilizing office requirements. With vacant sublease space down 23.4% year-over-year, companies are adapting to post-pandemic conditions by securing stable office solutions rather than offloading excess space.
On the sales side, the third quarter of the year saw continued changes, with a 38.6% decrease in square footage sold year-to-date compared to last year, totaling 2.4 million square feet. Over the same period, the average building size sold also dropped significantly, from 44,616 square feet in Q3 of 2023 to 24,737 square feet, reflecting a 44.6% reduction. Sales volume declined by 39.6%, closing the quarter at nearly $792 million year-to-date. This shift towards smaller, more manageable properties is likely to continue, indicating changing preferences among owner/users and investors. The sharp decline in sales volume and average building size suggests that the market is adjusting, with investors likely waiting for more favorable conditions and refining their criteria. This reduction in activity points to a period of adjustment, with both investors and tenants expected to continue adapting their strategies in response to these evolving market conditions.
