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2013 First Quarter Update

Growth – With approximately 700,000 square feet of positive net absorption to start 2013, the Orange County office market continued to show signs of recovery. Vacancy and availability continued to trend downward, while lease rates appear to be increasing. Although, these are positive indications, stability will need to be sustained in coming quarters to be considered a full recovery.

MarketTrendChartLease Rates – We are forecasting that rates will begin to increase in 2013. The average asking full-service gross (FSG) lease  rate, per month per square foot, in the Orange County office market was $1.88 at the end of the quarter- a 2.08% decrease from the previous year’s rate of $1.92 but the same as 2012’s fourth quarter rate, hopefully, indicating a bottom in the downward trend of asking lease rates. The record-high rate of $2.77 was established in the fourth quarter of 2008. Class A asking rates for the county averaged $2.09 FSG — the highest being in the North County submarket where Class A rates averaged $2.18 FSG.

Transaction Activity – Sales activity was up a bit, posting 290,000 square feet of activity in the first quarter of 2013 compared to 2012’s first quarter figure of 230,000 square feet. Leasing activity checked in at 2.6 million square feet in the first quarter of 2013, a decrease from the 2.8 million square feet we saw in the first quarter of 2012.

Vacancy – We are forecasting that vacancy will continue trending downward in 2013, ending the year around 12.5%.Vacancies continued their downward trend in the first quarter. Direct / sublease space (unoccupied) finished the year at 13.35%, a decrease from the previous year’s rate of 15.40% and significantly down from peaking at nearly 18% in the second quarter of 2010 and the market high of 23% recorded in 1990.

Construction – Total space under construction came in at just over 1 million square feet for the first quarter of 2013; the most notable projects were two build-to-suit projects: Hyundai in Fountain Valley (469,000 square feet) and PIMCO at Fashion Island in Newport Beach (479,800 square feet).

Absorption – The Orange County office market posted almost 700,000 square feet of positive absorption this quarter, all of which was in class B buildings, giving the market a total of over 2.4 million square feet of positive absorption over the past four quarters. Alone, Class B space had over 770,000 square feet of positive absorption in the first quarter. Look for research-oriented businesses — IT, defense, medical and alternative energy companies — to lead the charge of positive absorption over the next few years.

Employment – The unemployment rate in Orange County was 6.5% in February 2013 — down from a revised 7.1% in January 2013 and below the previous year’s estimate of 8.1%. This compares with an unadjusted unemployment rate of 9.7% for California and 8.1% for the nation during the same period. According to the State of California Employment Development Department, Orange County saw a net increase of 35,200 payroll jobs from November 2011 to November 2012. The largest gains were 9,700 in professional & business services and 8,200 in leisure & hospitality; however, Orange County lost 600 government jobs during that same period.

Overall –As we progress into 2013, positive absorption should continue to help the market to stabilize. We are beginning to see a decrease in the amount of vacant and available space. In addition, we foresee an overall increase in investment activity in the coming quarters. Lease rates have begun to firm up, and we expect them to increase in 2013. As many short-term deals come up for renewal, we should also see an increase in leasing activity. With the continuation of job creation and while consumer confidence stabilizes, the office market will continue to recover.

News You Can Use

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