02 Jun Market Update: Orange County
Market Update: Orange County
An Analysis on Q1 2021 and Beyond
As everyone knows, the past year has been filled with plenty of ups and downs. But it’s been over a year since our first shut-down due to COVID-19 and, here at Reynolds Realty Advisors, we are excited to say that when it comes to the real estate market in Orange County, many trends have been steadily and substantially on the rise!
And the good news doesn’t stop with real estate. Before we dive into the specific markets here in the OC, it is important to take note of the general economy. Throughout Q1 2021, Orange County has been ramping up– tourism is on the rise, hotel occupancy is up, and retail sales continue to increase to numbers higher than 2019 and 2020.
Jobs are also coming back, as companies are beginning to hire and expand once again. At the end of March, 2021, unemployment numbers in Orange County were just above 6%, nearly 2% less than the national average. While, similar to life, things are not quite “normal,” everything is trending in the right direction and we are looking forward to an even better Q2.
Now, let’s turn our focus to the real estate market. In this article we will be focusing on four areas of real estate: the office market, the industrial market, the retail market, and the multifamily market.
Office Real Estate in Orange County
Not surprisingly, the office market has had a tough time over the past year. Q1 2021 was the fourth consecutive quarter of negative absorption, this combined with new supply coming to the market has resulted in office vacancies continuing to rise, reaching 12% at the end of this March. Contributing to both the vacancy rates and the higher supply, is the continued trend of many companies continuing to let go of office space, at least for the time being, as more people are working from home.
However, with more companies letting go of space, more subleasing has been occurring and subleasing offers some exciting opportunities. There are companies using the high volume of available space to expand their operations. For example, California Pizza Kitchen is moving from their current 33,000 sqft space in Playa Vista space into Costa Mesa to take up residence in a 37,000 sqft space.
On another positive note, Q1 2021 was the strongest quarter when it comes to leasing since 2019. We started the year off strong when Anduril signed a 450,000 sqft lease in February at The Press in Costa Mesa, which was the largest lease in Orange County since 2016.
With all of that said, annual office rents dropped for the 3rd quarter in a row. This is primarily due to newly built, Class A properties having to compete with the high number of properties on the market, as well as the Class A sublet spaces offering a lower rent price. Class C properties have seen some positive rent growth as they are able to offer a competitive, affordable price. And finally, it is worth noting that while rents did decrease, they are still higher than 2018 numbers.
As the state and country continue the re-opening process, these numbers will likely change and how companies decide to go back will have a significant change on the market. For example, if more companies choose a hybrid approach of in office and virtual employees, they may need smaller private spaces or utilize coworking spaces. But if companies opt to bring everyone back, many may choose to spread out and will need more space for their employees. These next few quarters will be key and should offer more insight.
Industrial Real Estate in Orange County
While the office market has been having a tough year, things are undoubtedly looking up in the industrial space. Q1 2021 was the strongest quarter for growth in the industrial market in Orange County since 2019.
As 2020 was a major year for e-commerce, it is natural that a significant number of companies have been expanding their industrial space over the past year. This trend of course includes Amazon, who has leased a significant amount of space in the area over the past year, including the former Mitsubishi and Boeing campuses. A number of biotech and biomed corp companies are also expanding their industrial footprints in the area.
Overall, we are seeing a lot of positive trends in this sector including increasing demand, low vacancies (just over 3% at the end of Q1, well below the historical and national average) and steady rent growth, even throughout the past year.
Over the past year, some of the strongest submarkets for rent growth have been La Plama, Buena Park, Orange, Anaheim, Garden Grove and other northern parts of the county. These areas in particular offer warehouse space, which has really driven rent growth in those markets.
Some areas with more modest growth include southern communities such as Irvine Spectrum, Laguna Hills and Newport Beach. In general these areas are more expensive but they also have a higher percentage of R&D and flex spaces.
We are excited to conclude the industrial report by saying that the majority of the county is back above its historical average for industrial rent growth.
Retail Real Estate in Orange County
Similar to the office space, retail vacancies continued to expand in Q1 2021, as retail spaces were still closing in the beginning of the year. Although, as we are reopening, these numbers may shift in the other direction as more previously closed businesses reopen and new businesses are created.
Unfortunately, there is still a decrease in the number and size of leases. This trend toward smaller leases is evident when looking at the 5 year average size of retail spaces in Orange county being 3,030 sqft, compared to the average for 2,100 sqft in Q1 2021. It is interesting, though perhaps predictable, to note the larger leases that have been taking place have been signed by more affordable retailers, such as Dollar Tree, Dollar General, and Grocery Outlet.
With more vacant space and reduction in leasing, there has also been a loss in rent asking price. The height of 2020 retail same-store asking rent had around 5% YOY increase and in Q1 2021, this number was less than 4%. This of course is not helped by the increase in competition with e-commerce, which has picked up even more in the past year than before.
On a positive note, there are some new and unique development possibilities for the retail space. We may begin to see more of a blending of retail and multifamily in the same complexes. For example, the Fountain Bowl in Fountain Valley, a 4.88 acre lot, was recently sold for $17.4 million. The new owners have said they are interested in developing this space into multifamily and mixed use space.
There are still a lot of questions and potential changes when it comes to office and retail space but if you have any questions, we encourage you to reach out to us at elizabeth@reynoldsrealtyadvisors.com.
Multifamily Real Estate in Orange County
Apartments got hit hard in the first half of 2020 but since then, we have seen a strong recovery throughout the county. Let’s take a look at demand numbers for example. Last year, demand for apartments dropped well below historical averages in March, April and May. But since then, demand has been very high. In fact, with the exception of March 2021, which was slightly lower than the historical numbers, every month since June 2020 has been above historical averages. The trends we are seeing from early 2021, point to a very strong spring and summer leasing season.
In the first quarter of the year, apartment vacancy has been very low, even lower than pre-pandemic numbers. Alongside the low vacancy, there has been a steady increase in rents both in Orange County and nationally. In Orange County specifically, the data seems to show a trend to 1+ bed units, rather than studios. While studios have returned to similar rent prices of pre-pandemic times, 1, 2 and 3 bedroom apartments have soared above January 2020 numbers. This seems to be a reflection of the stay at home orders and the popularity of working from home.
The other trend worthy of note is where people are moving in Orange County. In the second half of 2020 and beginning of 2021, there has been significant rent growth in South County, Newport Beach and other coastal submarkets, as well as Irvine, which was able to fill many of the new units built in the early part of the year.
Finally, last summer, concession rates increased as managers tried to make up for the low spring leasing season. During that summer, 1 in 4 properties were offering concessions. The end of the year also saw higher concessions but they were much lower value concessions than what was seen in the summer. As we moved into 2021, concession rates have returned to lower numbers of properties offering concessions and the trend of more modest concessions continues.
As for all of the markets, it is clear that Orange County, and the nation as a whole, is undergoing a lot of change. But there is a lot to be hopeful about, as well as some real and exciting growth in particular markets. If you are interested in getting involved in the Orange County commercial market, the Reynolds Realty Advisor team would be honored to answer your questions and assist you in finding and managing the right property. Please reach out to us at (866) 613-7772 or elizabeth@reynoldsrealtyadvisors.com. You can also connect with our team on Facebook or our founder, Elizabeth Reynolds on LinkedIn.
*Data and analysis from this article is courtesy of CoStar. This material should not be relied upon for predictions of future results but to provide you with background, information and education.
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