By Carrie Rossenfeld, Orange County, Globe, April 21, 2014

Holdner: “The most notable trends shown by the report are the amount of available space that is decreasing and how asking leases are trending upwards.”

IRVINE, CA—Flex space is on a growth trajectory in Orange County, according to a Q1 report from Voit Real Estate Services. While vacancy was up, absorption negative and transactions down from the previous quarter, lease rates rose 1 cent and are 2 cents higher than they were during first quarter 2013, and deliveries have been flat, the firm reports.

Jerry Holdner, Jr., VP of market research for Voit and co-author of the report with market research analyst Tony Tran, tells the most notable trends shown by the report are “the amount of available space that is decreasing and how asking leases are trending upwards. For example, the availability rate for flex space in the first quarter of 2012 was almost 23%, and now it’s below 16%, which has put upward pressure on asking lease rates. The low for asking lease rates was $1.66 per square foot on a full-service gross basis in the second quarter of 2013, and now it’s at $1.69 and we’re forecasting that they will continue to trend upward.”

In the report, Holdner and Tran say lack of construction is a driver for flex rents and strong absorption. “Although 2014 is off to a slow start, 2013 brought the most positive absorption seen in the market in eight years. With no new deliveries in the pipeline to apply upward pressure on vacancy, we foresee 2014 being another year of stabilization and growth.”

Voit reports the county posted 210,000 square feet of negative net absorption in the first quarter for a total of almost 1.36 square feet of positive absorption for the last 14 quarters. The positive absorption can be attributed to recent employment gains. Vacancy was up 113 basis points from the previous quarter, with unoccupied direct/sublease space finishing the quarter at 12.45%, a decrease from the previous year’s rate of 13.25% and significantly down from the record-high rate of 25.85% recording in the second quarter of 2002.

Regarding flex-space availability, high-end space captured recent gains in occupancy. Direct/sublease space being marketed was 15.78% at the end of Q1, down significantly from the previous quarter and 2013’s Q1 rate of 18.6%, an annual decrease of 15.16%.

Leasing activity for flex space hit just below 580,000 square feet at the end of Q1, an increase over 2013’s Q4 total of 568,000 square feet leased. Sales activity came in at just above 400,000 square feet for the quarter, compared to 2013’s 355,000 square feet of sales transactions. Voit says this statistic can have some lag time in being reported, so look for Q1 figures to end up somewhat higher.

Looking ahead, Holdner and Voit say they anticipate job growth of roughly 1.5%, or 30,000 jobs, in the Orange County area over the look. Look for professional and business services and research oriented businesses—IT, defense, medical and alternative-energy companies—to lead the way for employment gains in the coming years. They predict average asking lease rates for flex space to increase by 2%-3% by 2015 and vacancy to continue to descend in coming quarters, dropping by 50 basis points to around 12% by 2015.

As reported earlier this month, available industrial space in Orange County also continues to be scarce, a fact that is helping to drive up sales prices in the sector, according to Voit. Following the trend of lease rates rising, sales prices are also gradually ticking up.