The fourth quarter offered indications that the Orange County office market is in the early stages of recovery just a year after being branded as one of the hardest-hit areas of the nation.
The local office sector recorded positive absorption in the fourth quarter, closing out 2010 with healthy overall gains in the rate of occupancy as well as significant upward movement by tenants for the year.
The gain followed eight quarters of negative net absorption stretching back to 2007. The annual increase came thanks to three straight quarters of positive net absorption capped off by the fourth quarter.
The streak appears to have solidified a sense of a substantial upturn rather than just a positive blip on the radar.
The fourth quarter saw a total of 20,241 square feet of positive net absorption, bringing the 2010 year-end total to a positive 517,426 square feet.
Class A Strongest
Annual absorption remained strongest in the Class A sector, accounting for 293,259 square feet.
The combined total for B and C buildings was 224,167 square feet.
Much of the absorption in the Class A category was fueled by affordable lease rates throughout 2010. Many companies took advantage of these lower rates to move up from Class B and Class C buildings.
Average asking lease rates still declined countywide, finishing the fourth quarter at $1.98 per square foot, off by two cents from the prior period. It was the 12th consecutive quarter of declines.
Current asking lease rates now are on par with the end of 2003, which turned out to be the bottom of a prior market cycle.
The continued declines in rents in the fourth quarter continued to give tenants an edge, but landlords gained some ground as longer-term deals began to resurface in the marketplace.
The fourth quarter vacancy rate remained unchanged from the previous quarter at 17.4%, ending 2010’s gradual decline on a quiet note. The break-even performance stood in stark contrast to the tumultuous vacancy rate increases of 2009.
The availability rate also declined slowly and steadily in 2010, hitting a rate of 22.9% in the fourth quarter, down from 23.3% for the prior period.
Contributing to the positive absorption in the fourth quarter was Wonderware Corp., a unit of Invensys Software Systems, which leased 152,880 square feet for an expansion at the Allred Corporate Center in South Orange County. Irvine-based video game company Blizzard Entertainment signed a lease to occupy two low-rise buildings near its Irvine Spectrum headquarters, totaling more than 100,000 square feet.
The South County submarket led the county in total annual absorption in 2010 at 378,279 square feet, while the Greater Airport Area was close behind with 368,188 square feet for the year.
The overall vacancy rate of 17.4% for the office market remained unchanged in the fourth quarter compared to the prior period. That was a decline from a vacancy rate of 17.9% a year earlier.
Availability Rate Down
The availability rate decreased for the third straight quarter, to 22.9%. The yearly total dropped by more than 4 million square feet, leaving 22.8 million square feet available at the end of the year.
North County’s available space increased the most from the third to fourth quarter, with an additional 76,553 square feet available.
South County saw the biggest tightening, with 253,441 square feet absorbed from the third quarter to the fourth quarter.
The slight decline in the average lease rate, meanwhile, indicates a return of some price stability in the market. The dip of two cents a square foot came to about 1% after price cuts of 4% and 3% in the two prior periods.
Average Class A lease rates finished the quarter at $2.14 per square foot.
Average Class B rates stood at $1.81, with Class C at $1.66.
Class A rates peaked in Newport Beach at $2.42. They were lowest in Rancho Santa Margarita, at $1.28 per square foot.
Rumors on several proposed projects during the third quarter fueled speculation in the office market, but no projects broke ground in the fourth quarter. A number of proposed projects remain in the pipeline but have yet to begin development. The lack of construction likely will help address excess supply if the economy continues to improve.
Analysis provided by CB Richard Ellis Research.
