Orange County’s beleaguered office market might not yet be in recovery, but there are signs that a turnaround is dawning.
The area’s office market, which totals about 108 million square feet, now counts a vacancy rate of about 18% to 19%, based on a sampling of local brokerage data.
While that’s up about half a percent from three months ago, the rate of additional empty space coming on the market appears to be slowing. That’s largely due to a recent steadying of the county’s unemployment rate and rising consumer confidence, among other economic indicators, brokerage officials said.
“The good news is that most all the indicators have turned or are starting to turn positive,” said Kurt Strasmann, managing director of brokerage services for Newport Beach’s Voit Commercial Real Estate, in a recent note to clients. “The bad news for the most part is (that it’s) at a very slow pace.”
For the area’s leasing brokers, the other source of good news is that deals appear to be picking up some steam after a slow 2009.
“We’ve been busy nonstop,” said Robert Caudill, senior vice president for the Orange office of Grubb & Ellis Co., whose group primarily represents office owners and tenants in northern OC and the Inland Empire.
The group—which worked on the 200,000-square-foot 40 Pacifica lease for the Federal Deposit Insurance Corp. in 2008—did about 700,000 square feet of leases last year and is on pace to exceed that level in 2010, according to Caudill.
“These days, I’m usually working until midnight,” Caudill said.
Businesses primarily are looking for nicer space at cheaper prices.
“Tenants are taking the opportunity to move up (to better space),” said Dean Chandler, senior vice president for the Newport Beach office of CB Richard Ellis Group Inc.
Chandler is handling leasing for Irvine’s 2050 Main Street office, which was built in 2007 but suffered from low occupancy levels under its previous ownership.
A partnership including Newport Beach-based developer and investor Greenlaw Partners bought the 14-story airport area tower early this year and installed an aggressive leasing and commission program.
Since then, the building’s seen several notable deals, including full-floor deals for AXA Equitable Life Insurance Co. and Marriott International Inc. in the past month, Chandler said.
Those two deals totaled about 50,000 square feet.
Available Space
Much of the empty space that was built at the most recent peak of the market is starting to be filled. But there still are scores of empty office floors in OC and close to 28 blocks of office space larger than 100,000 square feet available for lease.
Not all buildings are seeing increased levels of interest. The overall OC office market saw about 1 million square feet of negative absorption in the first quarter.
“We eked out” positive absorption for the quarter, said Steve Center, vice president of leasing and marketing for Irvine’s Bixby Land Co.
The company did about 60,000 square feet of local office deals in the quarter—about 23,000 square feet of that was for new tenants at the landlord’s local buildings.
“This is my third recession—you know what you have to do (to get leases signed),” Center said. “You have to work every deal,” even if that includes turning around a tenant proposal for space in less than a day, he said.
The area’s dominant landlord, Irvine Company, also said it bucked the general trend for OC’s office market, posting a net gain in absorption during the quarter, according to Steve Case, executive vice president for Irvine Co.’s office properties division.
Newport Beach’s Irvine Co. reported 1.4 million square feet of leasing last quarter, with about 1 million square feet of that in OC.
Tenant brokers said that Irvine Co. is picking up deals at the expense of several financially strapped area landlords, and that the company’s ongoing Ready Check commission program—which pays brokers their full commissions within 48 hours of getting an office lease signed—remains an effective way to get brokers’ attention.
Among the good signs for the local market, about 60% of last quarter’s Irvine Co. leases in OC were for new deals, Case said.
That’s a reversal from the past couple years, when new leases only made up about one-third of Irvine Co.’s office activity and renewals made up the bulk of deals.
New Irvine Co. deals signed of late include Henkel Corp.’s 77,000-square-foot lease for an entire office at the three-building, low-rise Jamboree Business Center complex near the Santa Ana (I-5) Freeway and a 70,000-square-foot deal for JPMorgan Chase & Co. at its Jamboree Center high-rise complex near the San Diego (I-405) Freeway.
Despite some big leases, it was the smaller end of the market that drove leasing in the first quarter, according to Case.
“Small, entrepreneurial companies are leading the way,” Case said.
The landlord’s average lease size in the first quarter was about 6,000 square feet.
Smaller companies have been averaging lease deals in the three- to five-year range, while larger office tenants have been signing deals in the five- to seven-year range, Case said.
While larger deals get the headlines, Irvine Co. studies suggest that the decision making of smaller businesses when it comes to lease-making is the best indicator of how strong the area’s economy is.
Smaller leases are “normally the first step in the recovery,” said Voit’s Strasmann. Brokers “hope it transitions to the larger transactions soon.” n
