Real Estate Watch: Low-Rise Office Space
Continuing Trends: Vacancy Up, Rates Down
After three years of explosive growth and activity, the low-rise market relaxed throughout 2001, along with the economy. The dot-com fallout played a significant part in the increase of sublease space. Sublease vacancy in the low-rise market, which includes flex properties, increased nearly 230% over the four quarters of 2001. That increase, combined with the rapid expansion of spec development, pushed the vacancy rate for low-rise space up to 14.4% in the fourth quarter, from 9.2% in the fourth quarter of 2000.
However, low-rise properties have remained a viable choice, offering cost benefits with lower asking rents, reduced or no parking costs, larger floor plates to accommodate larger tenant needs, and campus style environments full of amenities. So, although activity has relaxed from the extraordinary levels seen in recent years, net absorption remained positive in most areas.
Low-rise average asking rents remain approximately 9% lower than the county average for office space. The average asking lease rate for low-rise office space reached its peak in the first quarter of 2001 at $2.11. When activity slowed as the year progressed, landlords began lowering asking rents to retain existing tenants or attract new ones. As a result, the average asking rent dropped a total of 8 cents (4%) over the last three quarters of the year to $2.03 per square foot, ending the year a penny lower than in the fourth quarter of 2000.
Despite the relaxation of the low-rise market, construction remained active throughout 2001, in response to the exceptional activity experienced during the previous two years. A total of 81 new properties completed construction in 2001, adding nearly 2.8 million square feet to the market, approximately 76% of the total construction completed the previous year. More than 1 million square feet were completed in the fourth quarter alone, accounting for 37% of the total net rentable area added to the low-rise base.
As the office market moved further into the maturation phase of the real estate cycle, construction activity began to decelerate. Only two new low-rise properties, Birch Corporate Center and New Birch Plaza in the Airport Office Area, broke ground in the fourth quarter, adding 72,887 square feet to the construction already under way in the county.
Analysis provided by CB Richard Ellis’ Global Research and Consulting.
CHART NOTES
The Orange County office market includes multi-tenant buildings and parks 30,000 square feet or larger in size, but excluding government, medical and R & D; buildings. Low-rise is defined as one to three stories in height. Net absorption is the sum of building-by-building changes in vacant square feet over the given period. Vacant space does not include sublease space. Lease rates are per square foot, per month. Prior-period figures may have been restated from previously reported statistics.
