The office market in South Orange County has been lackluster at best in the first half, with rising vacancy putting downward pressure on lease rates and forcing landlords to offer more concessions to lure tenants.
The economic slowdown (particularly dot-com layoffs), increased energy costs, and considerable new construction of low-rise office campuses caused the vacancy rate to jump to 17.5% at the end of the second quarter. This was a 68% increase from the second quarter of 2000. The vacancy rate also reflects a significant amount of sublease space, primarily the result of technology firms downsizing.
As vacancy increases, rental rates typically decline. At the end of the second quarter, the average asking rent had decreased 6.7% year-to-year, to $2.40 per square foot per month.
With the exception of the 366,000-square-foot former Western Digital building in the Irvine Spectrum, the majority of the vacant space is in recently completed projects throughout South Orange County. Furthermore, more than 800,000 square feet of office product is expected to be delivered by the end of the year. As a result, the owners of these projects are offering concessions in the form of additional tenant improvements or free rent to qualified tenants.
This “tenant’s market” may be short-lived, however, as evidenced by 87,011 square feet of net absorption in the second quarter, compared to the negative 247,000 square feet for the year to date. Additionally, there are more than 3 million square feet of prospects considering South Orange County properties.
Still, the next six months should be an opportune time for tenants to evaluate their office needs in South Orange County.
Analysis by Bob Davis, First Vice President in the Newport Beach office of CB Richard Ellis, with supporting information provided by CB Richard Ellis’ Global Research and Consulting.
