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South County Gains Continue, But Class B Weakness Hobbles Growth

South County Gains Continue, But Class B Weakness Hobbles Growth

Demand for premium office space returned in the third quarter with four buildings opening their doors near the Irvine Spectrum at least 63% preleased. But the modest growth in the Class A market was overcome by another quarterly absorption loss in Class B space, which has led the overall market to its worst three quarters since the recession.

Countywide, net absorption was down 211,737 sq. ft. in the third quarter and is off 914,115 sq. ft. year to date. Demand for Class A space grew 160,702 sq. ft. in the third quarter but has gained only 249,081 sq. ft. in positive absorption for the year.

Class B space makes up slightly more than half the county’s 115 million sq. ft. total inventory. Absorption of second-tier space in Q3 was negative 369,356 sq. ft. and year to date is down nearly 1.2 million sq. ft.

Some Class B tenants have migrated to the Class A market, finding value as landlords of premium buildings compete against recently added supply. Also, most tenants have been choosing South County, where eight buildings totaling nearly 1.4 million sq. ft. were completed in the last 12 months.

Nine Class A buildings totaling about 1.9 million sq. ft. countywide were finished in the past four quarters, pushing up the Class A vacancy rate a point to 14.3% while the overall vacancy rate settled at 11.9%.

With supply running ahead of demand, rent growth has slowed in Class B buildings, averaging 2.3% this year, and average asking lease rates for Class A space have been flat.

The Airport’s 43.5-million-sq.-ft. inventory, the county’s largest market, reported 271,827 sq. ft. of negative absorption in Q3 and a net loss of 1.4 million sq. ft. in the last seven quarters.

Two new office developments are reflective of the recent market momentum favoring South County.

Boardwalk, the Airport market’s largest new building in about a decade, signed the largest lease in Q3, a 63,816-sq.-ft. deal with co-working space operator WeWork, and now is 40% leased. Boardwalk’s two nine-story towers at a key Airport-area intersection total 545,000 sq. ft. and were delivered late last year. It’s the second full-floor deal announced by project developer Trammel Crow Co.

Meanwhile, the South County posted 555,319 sq. ft. of positive absorption in Q3. In the last 11 quarters there have been 16 buildings completed totaling 2.85 million sq. ft. and 1.9 million sq. ft. of absorption. Also in Q3, the Irvine Co. completed The Quad at Discovery Park, four mid-rise buildings totaling about 365,000 sq. ft. Almost three buildings were leased up prior to delivery.

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