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SoCal Office Markets Seeing Flight to Low-Mid-Rise Buildings

4/19/22

This report provided by NAI Capital Commercial

As tenants renewing leases question what type of space and how much they’ll truly need, a flight to low-mid-rise office building space is playing out in Southern California markets.

In the first quarter of 2022, the overall vacancy rate for office space in Southern California crept up to 12.9% from the fourth quarter of 2021. However, low-mid-rise office buildings gained occupancy while high-rises were vacated.

Overall low-mid-rise office buildings (categorized as buildings six stories and under) gained 787.3k sf of positive net absorption while high-rise buildings (seven stories or higher) experienced 1.19 msf of negative net absorption. The vacancy rate in low-mid-rise office buildings declined while the vacancy in high-rise buildings increased, quarter over quarter.

The bifurcation in demand for office space shows a unique picture of the office market landscape at a time when companies are striving to entice office workers back into the office – and landlords are trying to reduce vacancies.

The overall average rent for all office space in Southern California averaged $3.26 per square foot per month on a full-service gross basis in Q1 2022, up 2.2% on an annual basis.

In contrast, the rent for low-mid-rise office buildings increased at a faster rate of 3.9% compared to 0.9% for office space in high-rise buildings, year over year.

Below is a snapshot by region of vacancy, average rent, and net absorption for each building size category.

Los Angeles County

In Los Angeles County low-mid-rise office buildings gained 762k sf of positive net absorption while high-rise buildings experienced 931.4k sf of negative net absorption.

While the overall vacancy rate for office space in LA County increased in the first quarter of 2022 to 14.4% from the prior quarter, the vacancy in low-mid-rise buildings decreased to 12.1%. Vacancy in high-rise buildings climbed to 18.3% during the first quarter.

LA County’s average office rent hit $3.49 per square foot per month, up 1.7% year over year. Brisk demand for office space in low-mid-rise buildings drove rent up in that segment of the market at a faster rate of 3.2% to $3.59 PSF, compared to a lower 1.2% for high-rise office space at $3.41 PSF, year over year.

Orange County

In Orange County low-mid-rise office buildings lost 141.5k sf in negative net absorption while high-rise buildings suffered more of a loss with 266.5k sf of negative net absorption.

Orange County’s average office rent stood at $2.73 per square foot per month, remaining flat year over year. Low-mid-rise rent ($2.69 PSF) increased 0.7% compared to a negative 2.0% for high-rise office space ($2.97 PSF), year over year.

The overall vacancy rate for office space in Orange County increased in the first quarter of 2022 to 11.9% from the previous quarter. The vacancy rate increased to 11.0% in low-mid-rise buildings and increased to 15.7% in high-rise buildings. In the first quarter, Orange County’s office market had a couple of large tenants in low-mid-rise buildings vacate their space and put it on the market for sublease, resulting in negative net abortion for the quarter in that segment of the market.

Inland Empire

Inland Empire low-mid-rise office buildings gained 144.7k sf of positive net absorption while high-rise buildings also added 7.7k sf of positive net absorption.

Inland Empire’s average office rent climbed to $2.29 per square foot per month, up 7.0% year over year. Low-mid-rise rent ($2.19 PSF) increased 6.8% compared to 3.4% for high-rise office space ($2.72 PSF), year over year.

The overall vacancy rate for office space in Inland Empire decreased in the first quarter of 2022 to 6.5% from the previous quarter. The vacancy rate decreased to 6.6% in low-mid-rise buildings and decreased to 4.8% in high-rise buildings. Inland Empire was the only office market that had an overall drop in the vacancy rate quarter over quarter and year over year.

Ventura County

In Ventura County low-mid-rise office buildings gained 22.2k sf in positive net absorption while high-rise buildings remined flat.

Ventura County’s average office rent inched up to $2.53 per square foot per month, up 2.8% year over year. With only two high-rise office buildings, rent ($2.47 PSF) remained 6.0% higher than last year in that segment of the market. Low-mid-rise rent ($2.50 PSF) increased 3.3% year over year.

The overall vacancy rate for office space in Ventura County decreased in the first quarter of 2022 to 12.1% from the previous quarter. The vacancy rate decreased to 11.9% in low-mid-rise buildings and remained elevated at 36.2% in high-rise buildings.

Work from home and trends toward physical distancing post pandemic have shifted demand for office space significantly, forging a preference toward low-mid-rise office buildings within less dense suburban office markets. Predominantly low-mid-rise office buildings saw improvement, whereas high-rises, so far, lagged in the recovery.


This report was prepared by J.C. Casillas, Managing Director, Research, NAI Capital CommerciaL







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