Orange County’s office market enters 2011 with rents at their lowest averages in nearly six years and vacancy rates approaching 20% for the best buildings.
Yet there are signs of improvement ahead for landlords.
“The worst is definitely over,” said Kurt Strasmann, managing director of broker services for Newport Beach’s Voit Real Estate Services. “There’s still downward pressure on rents. But the good news is that we’ve stabilized.”
The office market has “unequivocally reached the bottom,” said Jay Carnahan, managing partner for Irvine-based brokerage Orion Property Partners.
Tenants, particularly large ones, “realize now that they’re going to live—they’re not going to die—and they’re positioning themselves for success” by signing deals with favorable terms, Carnahan said.
There are plenty of good deals to be had, based on the latest figures for the office market.
Tenants looking for space in the county’s 108 million square feet of office space can expect to find monthly rates just below the $2 mark, according to a sampling of year-end data from local brokerages.
That’s down some 30% from the peak in 2007 and off about 8% from a year earlier.
Prime Space
For the roughly 50 million square feet of class A office space in the county, monthly asking rates now run about $2.14 per square foot, according to CB Richard Ellis Group Inc. figures. Those buildings were roughly 20% empty at the end of last year.
For class A space in the area around John Wayne Airport, rents are closer to $2.19 per square foot. The area has the highest vacancy levels of any submarket in the county, with 18.7% of the area’s 47 million square feet of empty space.
Factor in sublease and other space coming back on the market, and the airport area counts an availability rate close to 25%, according to CB Richard Ellis.
“You can get into good, class A space in the $2 (per square foot) range—before it was $3,” Strasmann said. “But this year could be the last that tenants have to (upgrade).”
Brokers representing tenants aren’t expecting big changes in rates this year. But they say 2012 could prove different.
“Tenants should capitalize on this,” said Randall Parker, president of Newport Beach’s Travers Realty Corp.
There are signs that many companies are doing just that. Voit’s brokers completed about a third more deals in 2010 than they did in 2009, according to Strasmann.
Other brokerages report more deals as well.
“We’re getting back to normal,” said Jeff Osborn, managing director for the Anaheim office of CB Richard Ellis and head of the company’s office division in Southern California.
The added activity of late has helped stop the bleeding for the office market, which has seen vacancy levels stick close to about 17.5% for the past few quarters, according to Voit’s latest data.
It’s not considered a true landlord’s market—or a market that’s ready for much development—until vacancy rates move closer to the 10% range.
That’s likely a few years off. But 2010 ended with signs pointing toward improvement.
The county saw close to a half million square feet of positive net absorption of office space last year. That was a step toward recovery after a decline of nearly 5 million square feet from 2007 to 2009, when retrenching companies unloaded unwanted space.
“Companies are starting to think about growth again, rather than shedding space,” said Greg May, co-managing director for the OC brokerage operations of Santa Ana-based Grubb & Ellis Co.
A tripling of 2010 absorption levels to 1.5 million square feet—which is about the annual norm for OC’s office market in a healthy economy—isn’t out of the question for 2011, according to some brokers.
“I think we’ll be closer to that average at the end of 2011 than we are today,” Osborn said.
Confidence Up
Businesses “are getting a little more clarity about the economy getting better,” May said. “At some point, they’re realizing that they will have to hire again.”
Healthcare, education and technology companies are among the local industries expected to see expansion in the year ahead.
Among specific companies, real estate sources point to Santa Ana’s CoreLogic Inc., Lake Forest’s Panasonic Avionics Corp. and Fountain Valley’s Hyundai Motor America Inc. as some of the large local companies expected to be making decisions on their office space this year.
Even mortgage companies, decimated in 2006 and 2007, are coming back with requirements for more space, Osborn said.
“The last couple years have been brutal,” he said. “But the general consensus is that we’re in the early stages of a recovery.”
Local economists are predicting job gains—a key driver for office space—of about 20,000 this year.
Another good sign for class A landlords has been an increase in interest from tenants for high-end space.
“Better buildings already have firmed up on rents,” Carnahan said. “For larger blocks of space, there are multiple tenants (bidding).”
Newport Beach’s Irvine Company has made a show of confidence in the local market, snapping up complexes in Costa Mesa and near its Newport Center headquarters in recent weeks.
“They appear to be winning the game of Monopoly,” Travers Realty’s Parker said.
According to area brokers, Irvine Co.’s been willing to drop starting rent levels, although it’s asking for larger-than-normal rent increases in subsequent years.
The landlord’s expectation is that the market will start improving soon, and tenants who sign new leases this year should see steady increases rather than face sticker shock when it comes time to renew amid a healthier economy several years from now.
