If you’re a large local tenant, it’s a good time to be window shopping for office space.
There are more options available for tenants,including big blocks of space at the nicest buildings,than at any time in the past five years.
Orange County’s office market saw another uptick in vacancy rates for the first quarter, rising about 1.5% in the past three months, based on local brokerage data.
The county’s vacancy rate now stands at about 15%, which is close to a doubling in size from a year ago, when OC had just about the tightest office market in the country.
Factoring in available sublease space, OC’s total vacancy rate runs closer to 18%. There was about 1.1 million square feet of negative net absorption in the first quarter, according to the Irvine office of Colliers International.
The effect of the increased vacancy rates can be seen in some of OC’s biggest offices.
There are 27 class A offices in OC with more than 100,000 square feet of space available, according to data from CoStar Group Inc.
Two years ago, finding five buildings with that much space was difficult,if not impossible,according to brokers who represent tenants.
“It sounds counter-intuitive, but it’s a challenging time right now, because there are so many options available,” said Royce Sharf, branch manager for the Irvine office of brokerage Studley Inc.
CoStar’s figures include 11 offices in Irvine, five in Orange and Anaheim, four in Santa Ana, three in Costa Mesa, and two each in Aliso Viejo and Brea.
In total, those buildings have 4 million square feet of space available, either immediately or coming in the next year or so, according to CoStar’s data.
A lot of that contiguous space is in the 124 high-rise buildings in the county. The availability rate for these towers, which total 26.5 million square feet, is about 24%, according to CB Richard Ellis Group Inc. That’s the highest vacancy rate of any office type in the county.
Preleasing Woes
Among the 27 largely empty buildings are five office towers that have opened their doors in the past year with a minimal amount of preleasing. Many of the other buildings on the list housed mortgage-related companies before the sector’s 2007 crash.
“It’s interesting to note that many of these were completed within the last few years, delivered fully occupied, (but) now have large blocks of space vacant,” said Michael Gold, regional analyst for Colliers International.
Properties on the list also include the headquarters for Irvine’s Impac Mortgage Holdings Inc. and the Aliso Viejo office of Lennar Corp., which are looking to sublease space at their offices.
Among landlords, Los Angeles-based Maguire Properties Inc. has the largest number of empty buildings at nine. The Irvine Company and Olen Properties Corp., both based in Newport Beach, each have two buildings with more than 100,000 square feet available.
Not every building listed as having a sizeable amount of available space has a correspondingly high vacancy rate.
Costa Mesa’s Plaza Tower,considered by many to be the county’s most prestigious office building,has an occupancy rate of 98%, but has close to 140,000 square feet of space where existing leases will be ending in the next 14 months. That space shows up in CoStar’s data.
Most of that space listed as available already is accounted for, or is nearing a lease renewal, according to officials with the Offices of South Coast Plaza, the office division of C.J. Segerstrom & Sons LLC that runs the 21-story building.
“We’re not sweating it,” said Richard Frost, leasing director for the Offices of South Coast Plaza.
The rapid increase in office vacancies is starting to have an effect on the county’s rents, which are down about 2% from a year ago.
Year-over-year lease rates,now standing at about $2.72 per square foot per month,are down for the first time since 2003, according to the Newport Beach office of CB Richard Ellis.
Gregory Leisch, chief executive of Washington, D.C.-based research firm Delta Associates, predicts rents will continue to decline through 2010 because of lackluster job growth in the area.
“Tenants are smelling blood in the water. Managing tenant expectations has become a challenge,” Sharf said.
Figuring out who will take up empty office space in the county remains a mystery to landlords as the long-term health of the local job market remains murky.
In OC, economists are predicting office employment to grow by 12,600 jobs in the next two years,or about half of what the region saw between boom years 2003 and 2006.
The 12,600 jobs would likely be enough growth to absorb about 3 million square feet of space currently on the market.
Historically, Los Angeles and OC’s office markets have moved in tandem. That’s not expected to be the case in the next few years, with Los Angeles remaining one of the best markets in the country.
Since 1980, the combined area comprising Los Angeles, the Inland Empire and OC have averaged a little more than 100,000 new jobs per year.
In the past year, the region shed some 24,400 payroll jobs, with OC giving back more than half that figure, thanks to the mortgage implosion, Leisch said.
Leisch predicts modest job growth in the L.A. Basin, particularly in OC, in the near term.
Delta expects jobs in the L.A. Basin to grow around 30,000 jobs through 2010, on par with what was seen in 2003. The firm expects the 2007-2008 period to be the nadir of the L.A. Basin’s job growth this cycle.
