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Office Market Keeps Momentum; Airport Area Leads Way

The second quarter of 2011 showed further signs of the Orange County office market approaching stability as it extended its healthy performance from the prior period.

Leasing activity has noticeably picked up and vacancy rates have consequently declined in response to five straight quarters of positive absorption.

The overall office market recorded more than 500,000 square feet of positive net absorption in the second quarter. The John Wayne Airport area accounted for almost 41% of the net absorption, while Central Orange County had 37%.

Class A Active

Class A high-rise buildings leased up more rapidly than most buildings in the county as tenants continued to take advantage of historically low lease rates and attractive concessions. The second quarter pushed the total net absorption above 2.2 million square feet for the first time since the office market started a streak of recovery in the second quarter of 2010.

The total vacancy rate decreased to 15.8% in the second quarter from 16.4% in the prior period.

It’s now down from a peak of 18.2% in the first quarter of 2010. The decline has been gradual, with average drops of .5% each quarter.

Vacancy rates saw the steepest decline for class A high-rise towers, in line with the high absorption recorded in those buildings during the second quarter. Demanding some of the highest rents in Orange County, the Newport Center submarket ended the quarter with the lowest vacancy rate in the market at 8.7%.

Asking lease rates during the second quarter continued to decrease, marking the 14th consecutive quarter of that trend.

The average asking lease rate for the county dropped one cent since last quarter from $1.96 per square foot to $1.95 per square foot in the second quarter.

Orange County began to dramatically decline in response to the national recession in the first quarter of 2008.

The decline for this year’s second quarter was only a half-percent decrease, the smallest since the downward trend began and a sign of stabilization.

Some Rent Hikes

While most landlords decreased or remained consistent with their asking rates, a handful of office buildings in Orange County actually increased rates in the second quarter for the first time in years.

Construction in Orange County remained minimal in the second quarter, with no new major office projects in the works. A preleased, 194,000-square-foot office building in Anaheim is under construction and slated for completion in the fourth quarter.

Numerous projects remain in the planning phase, with two major build-to-suit projects tentatively planned to break ground before year end. One is a 470,000-square-foot headquarters for Hyundai Motor America at its Fountain Valley campus. The other is a 380,000-square-foot headquarters being developed in Newport Center by the Irvine Company for Pacific Investment Manage-ment Co.

The Orange County office market absorbed 509,913 square feet of space during the second quarter. That marked five quarters of positive absorption with total net absorption of more than 200,000 square feet per period.

Absorption for the first and second quarters brings the total year-to-date net absorption for 2011 to more than 1.2 million square feet.

Airport Area Busiest

Absorption in the John Wayne Airport area accounted for the most activity, with about 208,000 square feet in the second quarter.

The Central Orange County submarket boasted similar numbers, with 190,490 square feet.

Class A buildings in the market recorded the highest amount of absorption with 361,132 square feet of space leased or taken off market.

By building type, high-rise properties recorded more net absorption than the low- and midrise segments.

The overall vacancy rate dropped to 15.8% in the second quarter from 16.4% in the prior period.

Vacancies in class A properties dropped to 17.9% while vacancy in class B dropped to 14%. Class C properties saw an increase to 14.1% in the second quarter.

Availability rates in the Orange County market remained steady from last quarter at 22.2% after falling for four quarters. The John Wayne Airport area and the South Orange County submarkets saw availability rates fall.

The rest of the market saw steady or increasing rates as landlords brought more space to market.

Class C availability rates rose to 18.7% while class B availability jumped to 19.9%.

Class A properties recorded a decline to 25% from 25.6% last quarter.

Asking Rate Down

The average asking lease rate for Orange County office properties dropped by one cent to $1.95 in the second quarter. It was the 14th consecutive quarter that lease rates have fallen since the recent market peak in the fourth quarter of 2007, when the average asking lease rate stood at $2.78.

The percent change over the last quarter represents the smallest decline in years, offering a good sign that asking rates could be stable or increasing by the end of the year.

Class A properties in Orange County were asking an average of $2.11 per square foot in the second quarter, with class B properties averaging $1.79 and class C properties averaging $1.60.

Lease rates saw minimal declines across the board except for in South Orange County, where rents remained stable since last quarter.

The airport area and South Orange County had the highest rent in the county at $2.01 and $1.98 per square foot, respectively.

Construction in Orange County remained minimal in the second quarter. No new major projects broke ground, leaving a 194,000-square-foot, built-to-suit project in Anaheim for Extron Electronics as the only development currently under construction. It is expected to be completed in the fourth quarter.

Analysis provided by CBRE Research.

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