Orange County Office Market Sees Improving Occupancy as Tenants Gradually Embrace Subleasing Opportunities
Vacancy Rates Decline as Subleasing Trends Shift and Investors Adapt to Evolving Economic Conditions
MARKET OVERVIEW
During the second quarter of 2024, the Orange County office market experienced a modest 0.5% increase in occupied office space quarter over quarter. This uptick contributed to a 70-basis point reduction in the vacancy rate year-over-year, lowering it to 12.7%, with a total of 19.9 million square feet of vacant office space. Office space under construction has reached its lowest levels since 2010, reflecting a period reminiscent of the market’s slow recovery from the Great Recession.
The ongoing transition between remote work and returning to the office has driven another quarter of positive net absorption, totaling approximately 1 million square feet for the first half of the year. Remarkably, subleasing has supported positive net absorption for the third consecutive quarter. The rate of change in vacant sublease space decreased by 3.7% quarter over quarter, marking a 4.8% year-over-year reduction to 2.05 million square feet. While vacant sublease space remains about 30.3% higher than pre-pandemic levels (Q2 2020), it is trending positively as more space is being leased than is coming onto the market.
Orange County Office Market Q2 2024 Statistics:
Overall, the Orange County office market had about 25.3 million square feet of available office space during Q2. Despite the ongoing challenge of encouraging a full return to the office post-pandemic, occupancy rates are gradually improving. The average asking rent remained stable compared to the previous quarter, averaging $2.80 per square foot on a full-service gross basis, which represents a 5.7% increase year-over-year. Leasing volume for the first half of the year was down 11.0% compared to the same period last year, largely due to soft demand and landlord concessions, such as lower rents, free rent, and flexible term commitments.
TRENDS TO WATCH
In the second quarter of 2024, subleasing activity for office space in Orange County slowed compared to the first quarter. Tenants subleased 165,382 square feet, marking a 37.0% decrease from the previous quarter. This brings the total subleasing activity for the first half of the year to a 7.2% decrease compared to the same period in 2023. Despite the significant amount of available sublease space, signs of a positive shift are emerging as tenants increasingly find value in subleasing. The average asking rent for sublease space is $1.93/SF, offering a 31.1% discount compared to direct space. The continued presence of discounted sublease space provides opportunities for tenants to optimize costs, while the decrease in vacant sublease space reflects a broader trend of stabilizing office requirements as companies adapt to post-pandemic conditions. This suggests that tenants are finding stable solutions for their current office space needs rather than offloading excess space.
On the sales side, the first half of the year saw a 55.0% decrease in sale volume compared to the previous year, totaling 1.8 million square feet. The average building size sold also decreased significantly, from 41,237 square feet to 29,956 square feet, reflecting a notable 27.4% reduction. This shift towards smaller, more manageable properties indicates changing investor preferences. The sharp decline in sale volume and average building size highlights a challenging market environment for transactions. Investors are likely waiting for more favorable conditions and adjusting their criteria. The overall reduction in activity points to a period of adjustment and caution. As the office market approaches its trough, both investors and tenants are expected to continue adjusting their strategies in response to these market shifts.
