Orange County’s Office Market Shows Signs of Stability Amid Work-from-Home and Return-to-Office Trends
While Overall Job Growth Poses Challenges, Sectors That Typically Occupy Office Space Are Showing Gradual Increases Buoying Occupancy
MARKET OVERVIEW
During the first quarter of 2024, the Orange County office market saw an increase in occupied office space. Quarter over quarter, occupied space rose by three-tenths of a percent, helping to maintain the vacancy rate at a steady 13.1% year over year, resulting in a total of 20.6 million vacant square feet of office space. The dynamics between remote work and returning to the office continue to unfold, with ‘returning to the office’ contributing to a second consecutive quarter of positive net absorption to start the year. Additionally, the growth rate of available sublease space decreased by 9.4% quarter over quarter, marking a 21.3% year-over-year drop to 3.6 million square feet. Nevertheless, this sublease space remained notably higher than during the Great Recession peak – but trending in the right direction. Overall, Orange County’s office market showed 25.8 million square feet of available office space during Q1. Although encouraging workers to return to the office has been a challenge since the pandemic, occupancy is slowly but steadily increasing.
Orange County Office Market Q1 2024 Statistics:
As office space occupancy stabilized, the average asking rent saw minimal change compared to the previous quarter, with a mere 1-cent increase quarter over quarter. However, rents remain noticeably higher than last year, with a 4.9% increase, averaging $2.80 per square foot on a full-service gross basis. This quarter’s leasing volume, up 19.7% compared to the start of last year, has been driven in part as the result of proactive landlord concessions, such as offering free rent depending on tenant credit and lease term commitment.
TRENDS TO WATCH
In the first quarter of 2024, tenants actively sought value in buildings with vacant sublease space. During this period, tenants subleased 242,092 square feet in Orange County, reflecting a 9.9% increase from the end of last year. This rise marked a 59.1% improvement in subleasing activity year over year. The trend of tenants seeking to offload excess square footage through subleasing is showing signs of reversal. Although a significant amount of sublease space remains available, the region is experiencing a positive decline as tenants increasingly find value in subleases. As subleasing activity intensifies, the average asking rent for sublease space, at $2.04/SF, offers a 15% discount over direct space.
The latest figures from the State of California Employment Development Department also indicate positive gains in the key office-occupying sectors, despite a rise in the unemployment rate in Orange County compared to a year ago. These sectors, which drive office space demand, have experienced growth since the beginning of the year. Leading the job increase is the Professional and Business Services sector, which saw a gain of 3,400 jobs, with the Administrative and Support Services subsector, the backbone of office demand, contributing the majority with 1,800 jobs. Additionally, Professional, Scientific, and Technical Services registered 2,100 jobs above last year, further indicating a stabilizing factor for office occupancy in Orange County.
On the sale side, sales volume decreased by 45% to $146.8 million from last year, with the average price per building square foot sold at $158/SF experiencing a notable decline of 36.4%. As the office market moves towards a trough, investors and tenants will continue adjusting their strategies in response to this market movement.
