The office market in Orange County is beginning to feel some relief following two years of challenges brought about by the mortgage industry meltdown and ensuing Great Recession.
The county’s office vacancy rate fell for the first time since the first quarter of 2006 and absorption was recorded for the first time in 11 quarters.
Though challenges persist that will slow the pace of recovery, OC’s unique dynamics—location, skilled workforce, international trade connections and high-tech industries—are expected to be significant factors in the region’s growth.
With job creation at the forefront of the recovery of the office market, OC’s employment growth is projected to be positive with the addition of 19,100 office jobs by the end of 2011, according to a recent report by CBRE Econometric Advisors. The county’s current unemployment rate of 9.2% remains among the lowest in Southern California.
The overall vacancy rate moved down to 18.2% in the second quarter from 18.4% recorded in the first quarter. Direct vacancy, which excludes empty sublease space, now stands at 16.8%, which represents a 1% decline from the first quarter.
Three out of the five submarkets also experienced declining vacancy levels, resulting from absorption in certain submarkets. North County’s vacancy level decreased to 15% from 15.7%; Central County declined to 18.4% from 19.2% and South County dropped to 17.9% from 18.3% in the first quarter.
The greater airport area recorded a nominal quarter-over-quarter rise to 19.6% from 19.5%, whereas West County inched upward to 11.1% from 10.3%.
The amount of total available space also declined from the first quarter, from 25.1 million square feet to slightly less than 24.7 million square feet. Available sublease space accounts for about 11% of the total space on the market.
The drop in vacancy was a result of the 198,697 square feet of absorption.
The majority of absorption took place in Central County, which absorbed a total of 136,513 square feet. North and South County also contributed positively, absorbing a combined total of 151,303 square feet in the second quarter.
This market’s absorption was offset by the West County and greater airport area submarkets, which had negative 37,725 and 51,394 square feet of absorption.
This recent positive change in occupancy is a significant sign for the office market, symbolizing modest recovery. Offsetting some of the negative absorption recorded in the first quarter, OC’s year-to-date total now is a negative 215,447 square feet.
Rents
Declining rents also are a contributing factor to the positive momentum witnessed in the second quarter. Many tenants are starting to look at expansion plans to take advantage of competitive lease rates and concessions being offered by landlords.
In the second quarter, the average asking lease rate dropped 8 cents to $2.06 per square foot. This latest decline places the average asking lease rate at 2005 levels.
Each of the OC submarkets declined in the second quarter. The most dramatic decline was in the greater airport area, which is down 11 cents to $2.13 per square foot. Central County followed closely behind with a loss of 8 cents off its rental rate to $1.89 per square foot, whereas West County declined 4 cents to $1.90 per square foot.
South County’s average rent now stands at $2.07, which represents a 6 cent decline. North County experienced the smallest decrease, going from $1.99 per square foot in the first quarter to $1.96 in the second quarter.
We are not seeing any construction of speculative buildings as demand for new office space will not be evident until a con- sistent trend of decreased vacancy levels can be established.
In the second quarter, there was one build-to-suit project that broke ground for Extron Electronics, which is expected to occupy the 194,000-square-foot Anaheim building by the second quarter of next year.
It will be a long road ahead for developers as they continue to remain cautious and put projects on hold until economic stability can be established.
Data and analysis by CB Richard Ellis Group Inc.
