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Plenty of New Development in Orange County–But Will Demand Continue?

By Tucker Hughes

The first quarter of 2019 ended with an uptick in available space across all products—office, flex and industrial—totaling just under 36 million square feet, an increase of roughly 700,000 square feet from the end of last year. This increase in available space is largely due to new product being delivered to the market as demand remains steady across all product types.

Some of the most notable office projects under construction include Tustin Flight, The Source at Irvine Spectrum, Spectrum Terrace (1st phase) and a handful of projects in Costa Mesa being rehabbed into “creative” space. We expect Phase 2 of Spectrum Terrace to kick off any day now as The Irvine Company has generated significant activity on at least one of the 116,000 square foot office buildings.

Year-over-year rent growth currently sits at 2.1%, while it was at 4.9% at the same time last year. The average asking rental rate across all classes of office space in Orange County increased very slightly to $2.58 per square foot. This increase in rent growth is the 26th consecutive quarter of growth. Will it continue in Q2? We will keep tracking. Despite the increase in the average asking rent, the vacancy rate climbed to 10.1%. Again, this is largely due almost 1 million square feet of product being delivered to the market over the past 12 months, despite the large blocks of space leased by tenants such as Anduril, Acorns, Chipotle and WeWork to name a few.

Industrial and “flex” rents in Orange County continue to increase and now sit at an average of $1.13 per square foot, up a penny from the last quarter of 2018. While rents are still increasing slightly, vacancy is increasing as well. The largest block of space that has opened up is the 1.1 million square feet vacated by JC Penney. Additionally, there has been a mass-migration of companies out to the more cost-effective markets of the Inland Empire, and there is sure to be some type of correction on rental rates in the greater Orange County area at some point in the near future.

The sentiment in Orange County is still a little uneasy as mostly everyone is expecting some type of pullback with the looming oversupply of office product. Orange County is a unique market in that the growth happens from within. Neighboring Los Angeles experiences hundreds, if not thousands, of new tech companies entering the market every year which keeps the office product in the prime markets filled.

We will continue to track slowing rental rates and increasing supply and believe we will finally have rental rates remain neutral or decline in the next quarter, which is great news for our clients!

Tucker Hughes is managing director at Hughes Marino, an award-winning commercial real estate firm with offices across the nation. As head of Hughes Marino’s Orange County and Los Angeles offices, Tucker specializes in tenant representation and building purchases throughout Southern California. Tucker makes frequent media appearances to speak on the future of commercial real estate, and is also a regular columnist for Entrepreneur.com. Contact Tucker at 1-844-662-6635 or tucker@hughesmarino.com.

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