Another Year of a “Tenant’s Market” in Orange County

Posted on May 30, 2012 · Posted in Analysis

The economy of Orange County is improving steadily but it is still considered a tenant’s market. Large tenants typically drive the recovery of the office market, however the list of these tenants in the office space market is much shorter than usual due to a large number of them signing blend and extend renewal agreements or just putting their plans on hold for the time being. Even without the help of these large tenants, the OC economy continues toward recovery.

Looking forward towards that recovery, there are a few things we can predict about the Orange County office market. The market has seen several consecutive quarters of positive net absorption, ignoring the first quarter of 2012, and 1.7 million square feet have been leased in the past year. Coupled with steady job growth, the demand for office space is building.

Although asking rates for class B and lower end office space continue to fall, the average asking rate of class A space has seen a dramatic jump so far in 2012. This trend could possibly show the end of the movement to quality, taking advantage of the lower rates. As demand keeps going up, the value available from discounted high quality office spaces will begin to disappear, forcing some tenants to look elsewhere for cheaper alternatives. As more tenants do this, the current jump in rates for class A will work its way down.

Many sectors continue to show improved employment numbers as well. Leisure and hospitality along with business services are both up over 4% leading total non-farm employment to go up nearly 2% in the last year. The education and health services sectors, along with modest gains in manufacturing are expected to lead the county’s job growth. The financial sector should also expect to see growth with Greenlight Financial and Cash Call announcing hiring plans for the summer.

All these signs point to an economy that continues to improve and add jobs. It is safe to assume that the tenant’s market will last at least for the rest of 2012 and into 2013, but as demand continues to build, we could shift back to a landlord’s market by early 2014.