Quest Software Inc. 19762 MacArthur Blvd, Irvine (4 Bldgs). 105,295 SF ... 3100 Lake Center Dr, Santa Ana. 60,500 SF. Di
Research & Forecast Report
ORANGE COUNTY | OFFICE Q1 2017
Accelerating success.
>> Orange County Rents Increase to Start 2017 Key Takeaways > The Orange County office market saw positive demand for the first part of the year. For the quarter, absorption totaled positive 154,200 square feet (SF). > Asking rental rates rose by 9.1% year-over-year to start 2017 at $2.62 per square foot (PSF) full service gross (FSG). > Due to an increase in absorption, overall vacancy fell to 11.9%. The market still exhibited momentum, as vacancy decreased by 120 basis points from one year ago. > Leasing activity jumped from fourth quarter recording 2.2 million SF. This level of leasing activity was last seen at the end of 2014. > The overall economy continued to see solid growth in fourth quarter. The Orange County unemployment rate has declined from 4.1% to 3.7% year-over-year.
Market Indicators | Relative to prior period Q1 2017
Forecast
Vacancy Net Absorption Construction Rental Rate
Summary Statistics | Orange County, Q1 2017 Class A
Class B
All Classes
13.1%
11.2%
11.9%
+30
-20
-10
111.5
-11.6
154.2
211.2
0
211.2
1,402.2
0
1,402.2
Vacancy Rate Change from Q4 ‘16 (Basis Points)
Net Absorption* Construction Completions* Under Construction* *SF, Thousands
Orange County Office Market The Orange County office market stared 2017 on a positive note as net absorption recorded positive 154,200 SF. Vacancy decreased to 11.9% dropping 10 basis points from last quarter. The additional new inventory planning to come online in 2017, provides opportunities for tenants seeking large blocks of Class A traditional and creative office space. As overall space options have become limited with vacancy declining and new construction coming online, asking rental rates have increased by 9.1% from one year ago. The Orange County office market will continue to be a target area for professional service tenants who are looking for space alternatives outside of Los Angeles and San Diego counties.
Asking Rents | Orange County, Q1 2017 Class A
Class B
All Classes
$3.06
$2.37
$2.62
$0.12
$0.07
$0.09
10.9%
6.8%
9.1%
Average Asking Rent Change from Q4 ‘16 ($)
Y.O.Y. Change (%)
Orange County Labor Force | Q1 2017 Total Nonfarm
Prof. & Business Services
Financial Activities
12-mo Employment Growth (%)
1.1%
2.6%
-0.78%
12-mo Actual Employment Change
17,000
7,700
900
ORANGE COUNTY | OFFICE
> Tenants looking for spaces greater than 100,000 SF have more options given the new office space that will be delivering in 2017. > South County supplanted West County with the tightest vacancy of all the Orange County submarkets at 8.7%, a 50 basis point decrease from last quarter. > FORECAST: Orange County office market vacancy is expected to trend downward until it levels in mid-2017 as new supply is delivered.
Historical Vacancy v. Rents | O.C. Office Market Q1 ‘13-’17 RENTS
VACANCY
$2.70
18%
$2.60
16%
$2.50
14%
$2.40
12%
$2.30
10%
$2.20
8%
$2.10
6%
$2.00
4%
$1.90
2%
$1.80
% VACANT (TOTAL)
> Overall vacancy continued a downward trend recording at 11.9%. This was a 10 point basis decrease from one quarter ago, due mainly to new deals signed in the 20,000-60,000 SF range.
$ PSF PER MONTH (FSG)
Vacancy
Q1 2017
0% 1Q13
1Q14
1Q15
1Q16
1Q17
Absorption and Leasing Activity
> Large tenant move-ins during the first quarter include Nationastar Mortgage Holdings to 1600 E Saint Andrew Pl. (152,800 SF), Blizzard Entertainment at 15253 Bake Pky. (65,000 SF) and Crown Castle USA, Inc. at 200 Spectrum Center Dr. (44,200 SF). These move-ins helped the South and Central County submarkets offset negative absorption in the rest of Orange County. > Leasing activity volume started 2017 on a high note recording 2.2 million SF, which was last recorded at this level end of 2014. > FORECAST: Absorption is expected to flatten in mid-2017 as new inventory will be delivered to the market and tenants continue to rightsize their existing space.
Net Absorption by Submarket | O.C. Office Market Q1 ’17 300,000
100,000 34,100
> Class B rental rates were the driving force behind the increase, recording a $0.07 increase to end at $2.37 PSF FSG. > FORECAST: Rental rates are expected to increase through 2017 as demand for both Class A & B product remains tight.
2
500
0 (5,800) (100,000) (125,200)
(200,000) AIRPORT
WEST
NORTH
CENTRAL
SOUTH
Historical Leasing Activity | O.C. Office Market Q1 ‘13-’17
Rental Rates
2,200,000 2,000,000 1,800,000
SF
> The direct weighted average asking rental rate in Orange County continued to increase due to new construction coming online along with decreasing vacancy rates. Overall asking rental rates recorded at $2.63 PSF FSG, a 9.1% increase from one year ago.
250,600
200,000
SQUARE FEET
> Net absorption remained positive for the 12th consecutive quarter recording 154,200 SF during first quarter. The Airport submarket recorded the highest negative demand (-125,200 SF), followed by West County (-5,800 SF). South County recorded the highest positive absorption at 250,000 SF.
1,600,000 1,400,000 1,200,000 1,000,000 1Q13
1Q14
1Q15
1Q16
1Q17
ORANGE COUNTY | OFFICE
> Irvine Company completed the Sand Canyon Business Center development, delivering 211,200 SF to the market. > Currently, there are three office projects under construction totaling 1.4 million SF. Trammell Crow’s development The Boardwalk in Irvine and Irvine Company’s 400 Spectrum Center in Irvine Spectrum are both expected to be completed by third quarter 2017. The Broadcom Campus is expected to be completed in 2018. > FORECAST: New construction inventory is expected to grow throughout 2017. Irvine Company’s The Quad at Discovery Business Center is expected to break ground soon which includes 4 office buildings totaling 317,000 SF. As creative office space demand continues, the former LA Times facility in Costa Mesa is expected redeveloped into creative space.
Historical Net Absorption & Construction Completions O.C. Office Market Q1 ‘13-’17 NET ABSORPTION
1,000,000
500,000
0
(500,000)
(1,000,000) 1Q13
Investment Trends
> Investment activity for properties over 25,000 started 2017 slow as sales volume recorded $131.0 million, a 65% drop from one year ago . > Investors are expected to remain stable in the Orange County market, targeting not only Class A trophy buildings, but also value-add creative space redevelopment opportunities. > Office building sales averaged $290 PSF with the two largest transactions being: Pinnacle Asset Management Group purchasing the Towne Centre Plaza for $267 PSF and Pendulum purchasing 5 Peters Canyon Rd. in Irvine for $266 PSF. > FORECAST: Investment activity is expected to remain stable moving into 2017.
Outlook
The Orange County office market should continue to see positive returns through 2017 as vacancy continues to decrease and absorption remains positive, albeit at a more measured pace than 2016. Along with the new Class A trophy building construction and creative office redevelopment the market supply will continue to grow. Asking rental rates are expected to increase from upward pressure of new construction delivering in 2017.
CONSTRUCTION COMPLETIONS
1,500,000
SQUARE FEET
Construction
Q1 2017
1Q14
1Q15
1Q16
1Q17
Investment Trends Chart O.C. Office Market 2010-2017 $300.00
9.0% 8.0%
$250.00
7.0%
$200.00
6.0% 5.0%
$150.00
4.0%
$100.00
3.0% 2.0%
$50.00
1.0%
$0.00
0.0% 2010
2011
2012
2013
2014
$/PSF
2015
2016
2017
Cap Rate
Unemployment Rate | U.S., C.A. & O.C. | February 2017 6%
4.9%
5.2%
4%
3.7%
2%
0% UNITED STATES
3
CALIFORNIA
ORANGE COUNTY
ORANGE COUNTY | OFFICE
Q1 2017
Market Description
Orange County is a moderately large suburban office market comprised of 83 million square feet and represents 29% of the total inventory in office buildings 25,000 square feet and greater in the Los Angeles basin. Orange County is a relatively new and moderate-density market with 41% of the space in Class A buildings. Orange County is home to a broad mix of firms, including significant representation from the finance, insurance, telecommunications, high-tech, real estate, engineering and professional-service sectors.
Submarket Map
RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Orange County Office Market Q1 2017
SALES ACTIVITY PROPERTY ADDRESS
SIZE SF
SALE PRICE
PRICE PSF
BUYER
SELLER
26632 Towne Centre Dr, Foothill Ranch (3 Bldgs)
67,900 SF
$40,000,000
$195 PSF
Pinnacle Asset Management Group
Blackstone
5 Peters Canyon Rd, Irvine
156,500 SF
$41,675,000
$266 PSF
Pendulum
TA Realty
4 Polaris Way, Aliso Viejo
90,600 SF
$34,750,000
$383 PSF
Invesco Real Estate
Quest Software Inc.
19762 MacArthur Blvd, Irvine (4 Bldgs)
105,295 SF
$27,000,000
$256 PSF
Kelemen Caamano Investments
CIP Real Estate Property
14725 Alton Pky, Irvine
59,000 SF
$15,300,000
$260 PSF
Chapman University
Greenlaw Partners
PROPERTY ADDRESS
LEASED SF
LEASE TYPE
BLDG CLASS
LESSEE
LESSOR
3333 Susan St, Costa Mesa
101,800 SF
Direct
A
The Los Angeles Chargers
Steelwave
5241/5231 California Ave, Irvine
92,100 SF
Direct
B
Toshiba America
The Irvine Company
15253 Bake Pky, Irvine
65,000 SF
Direct
B
Blizzard Entertainment
CTA, LP
3100 Lake Center Dr, Santa Ana
60,500 SF
Direct
A
Orange County Transportation
CJ Sergerstrom & Son
2600 Michelson Dr, Irvine
60,000 SF
Direct
A
Jacobs Engineering
Dune Real Estate Partners, LP
PROJECT
DEVELOPER
SIZE SF
SUBMARKET
STATUS
ESTIMATED COMPLETION
The Boardwalk, Irvine
Trammell Crow
537,200 SF
Airport Area
Under Construction
3Q 2017
Broadcom Corporate Campus
DPR Construction,
440,000 SF
South County
Under Construction
1Q 2018
400 Spectrum Center, Irvine
The Irvine Company 425,000 SF
South County
Under Construction
3Q 2017
LEASING ACTIVITY
MAJOR DEVELOPMENTS
4
ORANGE COUNTY | OFFICE
Q1 2017
OFFICE OVERVIEW
Orange County Office Market Q1 2017 EXISTING PROPERTIES
VACANCY
ACTIVITY Leasing Total Leasing Activity Vacancy Activity YTD Current Qtr Prior Qtr SF SF
Under Construction SF
(34,900)
(34,900)
0
537,200
$3.26
(102,800)
(102,800)
0
0
$2.56
12,500
12,500
0
0
$2.09
1,327,900
(125,200)
(125,200)
0
537,200
$2.96
Direct Vacancy
Sublease Vacancy
A
106
22,310,200
12.8%
0.8%
13.6%
13.5%
727,800
727,800
B
244
14,624,200
12.1%
0.5%
12.6%
11.9%
536,700
536,700
C
59
2,703,000
6.6%
0.0%
6.6%
7.1%
63,400
63,400
409
39,637,400
12.1%
0.6%
12.8%
12.4%
1,327,900
Net Absorption Current Qtr SF
RENTS
Completions Current Qtr SF
Total Inventory SF
Total Vacancy
CONSTRUCTION
Net Absorption YTD SF
Bldgs
Submarket/ Class
ABSORPTION
Weighted Avg Asking Lease Rate
AIRPORT
SUBTOTAL CENTRAL A
29
5,620,900
12.7%
0.5%
13.2%
11.4%
75,300
75,300
(97,500)
(97,500)
0
0
$2.32
B
79
6,090,400
16.0%
0.5%
16.5%
18.2%
77,300
77,300
103,100
103,100
0
0
$2.12
C
58
2,281,500
14.5%
0.0%
14.5%
15.8%
33,400
33,400
28,500
28,500
0
0
$1.49
SUBTOTAL
166
13,992,800
14.4%
0.4%
14.8%
15.1%
186,000
186,000
34,100
34,100
0
0
$2.09
14
1,633,700
11.0%
3.9%
14.9%
15.3%
83,400
83,400
6,700
6,700
0
0
$2.23
B
56
4,984,400
10.2%
0.5%
10.7%
10.6%
85,600
85,600
(6,200)
(6,200)
0
0
$1.99
C
22
958,500
7.0%
0.0%
7.0%
7.0%
6,600
6,600
0
0
0
0
$1.63
SUBTOTAL
92
7,576,600
10.0%
1.2%
11.1%
11.1%
175,600
175,600
500
500
0
0
$2.01
NORTH A
SOUTH A
23
4,081,091
10.2%
0.2%
10.4%
11.3%
137,600
137,600
224,400
224,400
211,200
865,000
$3.34
B
215
11,728,800
6.6%
0.9%
7.5%
7.6%
328,500
328,500
7,900
7,900
0
0
$2.60
15
638,616
21.1%
0.0%
21.1%
24.0%
14,000
14,000
18,300
18,300
0
0
$1.98
253
16,448,507
8.1%
0.7%
8.7%
9.2%
480,100
480,100
250,600
250,600
211,200
865,000
$2.77
C SUBTOTAL WEST A
8
1,029,700
6.3%
0.9%
7.3%
8.5%
13,800
13,800
12,800
12,800
0
0
$2.61
B
54
2,999,300
8.8%
0.0%
8.8%
8.3%
40,000
40,000
(13,600)
(13,600)
0
0
$2.07
C
32
1,274,200
11.0%
0.0%
11.0%
10.6%
19,600
19,600
(5,000)
(5,000)
0
0
$1.80
SUBTOTAL
94
5,303,200
8.8%
0.2%
9.0%
8.9%
73,400
73,400
(5,800)
(5,800)
0
0
$2.06
0.8%
13.1%
12.8%
1,037,900
2,346,200
111,500
111,500
211,200
1,402,200
$3.06 $2.37
MARKET TOTAL A
180
34,675,591
12.2%
B
648
40,427,100
10.6%
0.6%
11.2%
11.2%
1,068,100
2,452,000
(11,600)
(11,600)
0
0
C
186
7,855,816
10.8%
0.0%
10.8%
11.7%
137,000
466,400
54,300
54,300
0
0
$1.76
1,014
82,958,507
11.3%
0.6%
11.9%
12.0%
2,243,000
5,264,600
154,200
154,200
211,200
1,402,200
$2.62
TOTAL
Note: revisions to the inventory base were made effective Q1 2017, historical data reported here reflect these revisions and may not match data reported in previous quarters.
5
ORANGE COUNTY | OFFICE
Definitions of key terms in this report Total Rentable Square Feet: Office space in buildings with 25,000 square feet or more of speculative office space. Includes competitive space in Class A, B and C single-tenant and multi-tenant buildings. Excludes non-competitive owner-occupied buildings, buildings that include 30 percent or greater of medical or retail space, and space that is under-construction, underrenovation or off-market. Class A Space: Space that an image-conscious company would lease for its headquarters. Typically, this space has a very high level of finish and an excellent location, and commands the highest rents in the market. Class B Space: Highly functional, attractive space, but less prestigious than Class A Space, and commanding lower rental rates. Class C Space: Functional, competitive space, but with a lower level of finish and/or a less desirable location than with Class B Space, and commanding lower rental rates.
Q1 2017 Space Added (Net): Total square feet added during the quarter via construction completions, including renovated space returned to market, less total square feet taken off-market due to demolitions or conversions. Under Construction: Includes buildings that are in some phase of construction, beginning with foundation work and ending with the issuance of a Certificate of Occupancy Technical Note: Colliers International is continuously refining its database. The data shown in the historical tables and graphics in this report have been adjusted to take into account these changes in the database. This report has been prepared by Colliers International for general information only. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This report and other research materials may be found on our website at www.colliers.com/greaterlosangeles.
Low-Rise: Buildings with a total of 4 floors or less. Mid-Rise: Buildings with a total of 5 to 13 floors. High-Rise: Buildings with 14 or more floors. Direct Vacancy: Space in existing buildings that is vacant and immediately available during the quarter for direct lease, plus space that is vacant but not available for direct lease or sublease (for example, that is being held for a future commitment). Total Vacancy: Space in existing buildings that is vacant and immediately available during the quarter for direct lease or for sublease, plus space that is vacant but not available for direct lease or sublease. Net Absorption: Net change in occupied square feet from one period to the next (includes the impact of change in vacant space available for sublease). Leasing Activity: Square feet leased from all known transactions completed during the quarter. Excludes lease renewals. Weighted Average Asking Rental Rates: Weighted by the total square feet available for direct lease. Data is based on Full Service Gross rents, and includes all costs associated with occupying the space, including taxes, insurance, maintenance, janitorial service and utilities. Reported on a monthly, per SF basis. 6
396 offices in 68 countries on 6 continents United States: 153 Canada: 29 Latin America: 24 Asia Pacific: 79 EMEA: 111
> $2.6 billion in annual revenue > 2.0 billion square feet under management > Over 15,000 professionals
UNITED STATES: Orange County Office License No. 00813140 3 Park Plaza, 12th Floor Irvine, CA 92614
CAITLIN MATTESON Research Director Research Services
TEL: +1 949 474 0707 FAX: +1 949 724 5600
ROBERT CAUDILL Regional Director/O.C.
