53.2 F
Laguna Hills
Thursday, Mar 28, 2024
-Advertisement-

CALIFORNIA OFFICE MARKET

CALIFORNIA OFFICE MARKET

ORANGE COUNTY

Office market conditions continued to send mixed messages in Orange County for the first quarter.

Despite showing signs of increased activity and net absorption, the office market is feeling the effects of falling rents due to aggressive competition among landlords to secure tenants.

Asking lease rates for class A and class B buildings continued to drop at a gradual pace in the first quarter, with class A off 14% and class B down 10%, vs. a year earlier.

Net absorption for the quarter was 272,063 square feet, vs. a loss of 166,961 square feet a year ago. The class A market was responsible for most of the activity, with 421,486 square feet of positive absorption for the quarter.

Leasing activity was off 13% to 1.46 million square feet.

Two of the largest office deals in the first quarter represent current market conditions, both from an economic and real estate standpoint.

Pfizer Inc. and Sprint PCS both renewed their leases. Sprint, as part of the downsizing telecom industry, renewed its lease but for half the space it once occupied.

Pfizer renewed for nearly triple its space. Combined, these two companies represent 120,000 square feet of contraction and expansion.

This expansion and contraction of two very large tenants is illustrative of the mixed signal being seen in the office market.

Total space under construction checked in at slightly more than 800,000 square feet in the quarter. That’s 20% higher than at the end of the fourth quarter.

About 267,000 square feet of new space broke ground in the quarter. This healthy rate of construction is expected to continue: small-office developments totaling more than 400,000 square feet are set to break ground later this year and in early 2004.

Almost 90% of OC’s planned development projects are in South County. Most are targeted at the owner-user sale market.

Average asking sale prices in South County are currently at $218 per square foot on a shell basis and are expected to increase this year.

One of the largest development projects is the A.J. West Ranch business park in Lake Forest. Twenty-nine small office and flex buildings will be built on 10.5 acres. About 20% of the project is in escrow.

Smaller properties in the 3,000- to 15,000-square-foot range accounted for most of the quarter’s sale activity, just as they have for the previous two quarters.

In the first quarter, buildings of 15,000 square feet and less made up two-thirds of market activity. Sale prices of small commercial office properties remained strong due to historically low interest rates.

Job growth, the key driver of the real estate market, should improve by next year. The county is projected to add 30,000 to 35,000 jobs annually in the next decade, with about one-third of that growth in office-oriented professions.

Looking ahead, lease rates in the next six months will fall 5% to 7% with increased concessions. User sale prices are projected to grow 5% to 10% in the period, provided interest rates remain at record low rates.

And net absorption will continue to post steady growth in 2003 as the jobs picture improves in OC.

INLAND EMPIRE

The Inland Empire’s office market continued to build momentum heading into the year, despite a lingering recession.

With stalwart market conditions embodying a surging housing market, new development and user demand, businesses are migrating east. Total absorption remained positive for the fifth consecutive quarter, largely due to steady tenant interest and minimal sublease space, allowing landlords to maintain asking rents and longer terms.

Construction under way grew to 600,000 square feet of speculative projects, vs. 386,487 square feet the previous quarter. This confirmation of developer confidence will also equate to further owner-user transactions and institutional investments.

Noteworthy construction activity occurred in the cities of Riverside and Rancho Cucamonga.

But two short-term effects may potentially surface as new projects enter the market: vacancy rates may stabilize and lease rate increases could temporarily stall.

As vacancy rates hold tight and the economy stabilizes in a post-war climate, this local office market will maintain its strength based on its performance through the recent recession.

With current product demand becoming greater than the supply, the Inland Empire will see slight lease rate increases as vacancy rates plateau due to steady activity.

This may be offset by the introduction of 600,000 square feet of speculative construction to the market by year-end.

This new space could nullify any drastic dips in future vacancy rates, although continued robust tenant interest could counter that trend. Investor and tenant interest in the smaller product will remain a norm in this market.

However, assuming interest rates reside at low levels, the Inland Empire could see enhanced sale activity in larger space, too.

Inland Empire developers possess a major opportunity with the potential development of commercial-zoned land available at lower costs than surrounding counties.

This played an important role in several projects under construction including: San Bernardino’s class A Tri-City project of 80,750 square feet, Rancho Cucamonga’s class A Fairway Business Center (North) at 55,000 square feet; and Riverside Gateway, a 92,000-square-foot development.

LOS ANGELES

The Los Angeles office market gained more than 900,000 square feet of occupancy in the first quarter, the strongest showing in two years.

Vacancy fell 60 basis points to 16.1% and average class A asking rents were level at $2.42 a foot.

The biggest gains came in the Tri-Cities where Clear Channel Communications Inc., a San Antonio-based radio operator, took down 90,000 square feet in Burbank, and on the Westside, where Pepperdine University signed on for 125,000 square feet at Howard Hughes Center.

Other major deals included a 152,000-square-foot lease by Bank of America at BP Plaza,under which the building, one of downtown’s premiere skyscrapers, will be renamed Bank of America Plaza,and a 48,000-square-foot lease by Countrywide Financial Corp. in Pasadena. Rumor also has HBO close to signing a 110,000-square-foot lease at MGM Plaza in Santa Monica.

Although the BofA deal will eventually result in a net loss of occupancy,the bank will downsize from 468,000 square feet at ARCO Plaza before moving in September,and though the HBO deal would move the company to a space that is smaller than the one it now occupies, the other large leases may indicate the turning of a new leaf for the county.

Pepperdine, for example, will vacate about 40,000 less square feet than it will occupy in its spacious new digs, while Clear Channel, though consolidating eight stations to its new location, has included room for expansion.

Perhaps most telling, Countrywide, the growing Calabasas-based lender, will sublease its space from idealab, a struggling incubator of tech and dotcom startups.

It was the crash in tech and dotcoms,of which idealab was an integral part,that two years ago spun the county’s office market into its deepest despair in a decade.

Since then, home buying has buoyed the county economy.

Yet the county’s new leaf may turn out to be a wilted one, for although a few high-profile leases may speak of market recovery, many existing tenants are paring down space needs, while new companies seem to need less space.

As a result, the median lease size fell to 4,741 square feet in the first quarter, down from 5,880 square feet last year and 5,869 square feet in 2001.

Also, when downsizing tenants eventually move, vacating their current digs, the net effect will be to increase vacancy, since there is little in-migration of new tenants right now.

When existing tenants are not paring down space needs, they are often renewing leases instead of moving.

Since 2000, renewals as a percentage of total new leases have almost tripled, from 6.5% to 17%.

Landlords have encouraged this pattern. For in addition to warding off the marketing and transaction costs of finding a new tenant, as well as the costs of some tenant improvements, renewals preempt turnover vacancy, which has grown to almost 15 months.

Office sales should continue to shine in the second and third quarters as properties should remain attractive, regardless of whether leasing stays slow or strengthens.

Want more from the best local business newspaper in the country?

Sign-up for our FREE Daily eNews update to get the latest Orange County news delivered right to your inbox!

-Advertisement-

Featured Articles

-Advertisement-
-Advertisement-
-Advertisement-
-Advertisement-

Related Articles

-Advertisement-
-Advertisement-