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8/18/24
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This report provided by real estate services firm NAI Capital Commercial
MARKET OVERVIEW
The Ventura County office market's recovery is ongoing but faces challenges in boosting occupancy levels. Landlords, grappling with weak demand and high vacancy rates, have started adjusting asking rents to address the persistent surplus of unoccupied office space. In Q2 2024, vacant office space increased by only 57.9k sf year over year, suggesting the market might have reached a low point in this cycle. Additionally, available sublease space rose by 7.2% compared to the previous year.
Throughout the first half of 2024, vacancy rates have fluctuated, with the overall rate rising by 10 basis points year over year to 12.4%. The growth in vacant office space has begun to stabilize, influenced by evolving remote work trends and changes in space utilization strategies. Since the start of 2024, direct available office space has increased by just 24.6k sf, nearing pre-pandemic levels from 2020. Notably, vacant space has remained above the pandemic shutdown peaks for 18 consecutive quarters. The surge in vacant sublease space has been substantial, more than quadrupling since 2020 to approximately half a million square feet—levels not seen since the Great Recession. Despite this record influx of sublease space, asking rents have remained relatively stable, with a slight increase of 2 cents from the prior quarter to $2.47 per square foot on a full-service gross basis—up 1 cent from a year ago. The average asking rent has shown some resilience despite a 19.2% decrease in year-to-date leasing volume compared to the same period last year.
TRENDS TO WATCH
Tenants seeking value might find opportunities in buildings with vacant sublease space. In the first half of 2024, tenants subleased 23.6k sf in Ventura County, representing a 12.9% increase compared to the same period in 2023. The trend of offloading excess space through subleasing continues, with a modest 7.2% rise in sublease space offerings by mid-year Q2. This increase is particularly notable in the East submarket, which had 476k sf of available sublease space, compared to just 19k sf in the West market. As subletting activity grows, the average asking rent for sublease space in Q2 was $2.07/sf, offering a 16.2% discount compared to direct space. Sublessors, motivated by the need to discount space that has been on the market for extended periods, may eventually lower rents further to stay competitive with direct space.
Employment sectors that drive office space demand have seen growth. The latest figures for June from the State of California Employment Development Department show positive gains in these key sectors, despite a rise in the unemployment rate in Ventura County compared to a year ago. Since the beginning of the year, the Professional and Business Services sector has led the job increase with a gain of 1,100 jobs. Crucial for office demand, this growth signals a stabilizing factor for office occupancy.
Additionally, the average cap rate for office properties increased by 40 basis points in Q2 2023, reaching 6.0%. This rise in cap rates has led to a significant decline in the average price per building square foot, which dropped by 7.5% year over year to $241/sf. Sales volume for the first half of the year also fell by 1.8% to $53.8 mil, with the average size of buildings sold decreasing to 11.8k sf. This trend is expected to continue into the second half of the year as the market approaches its trough.
This report was prepared by J.C. Casillas, Managing Director, Research, NAI Capital Commercial
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