Orange County
The effects of the subprime mortgage meltdown have hit hardest in Orange County, where we’ve seen a 240 basis point increase in the vacancy rate in the past year and the addition of 4 million square feet of office space to the market in 2007, closing the first quarter of 2008 at 14.9%. As the market continues on its natural course we see opportunity in the form of lower occupancy costs.
With vacancy rates expected to increase to more than 20% in some submarkets in the next year, look for the gap between asking and actual lease/sale rates to decrease. Landlords and owners have become extremely motivated to fill their spaces, resulting in a market driven by users.
OC is beginning to see an influx of national law firms eager to capitalize on the litigation associated with the subprime meltdown; large market capitalization companies and foreign investors looking for high-end space in an undervalued marketplace.
The airport area vacancy rate climbed to 16% with the opening of buildings and space coming back to the market. Net absorption ended the quarter with negative 131,617 square feet,a value linked to New Century Financial Corp. and Quick Loan Funding vacating space at 3121 Michelson, Private HealthCare Systems vacating space at 3345 Michelson and Experian Group Ltd. moving out of 555 Anton.
The airport area’s availability rate is 22%, meaning future vacancies will come back onto the market in the near future: 17770 Cartwright with 103,000 square feet, 18201 Von Karman with 70,000 square feet, and 600 Anton with 110,000 square feet. As the vacancy rate increased above 15%, monthly asking rents for class A space decreased to $3.17, while class B rents decreased to $2.50.
Office construction in South County has continued while demand has dwindled. More than 1.5 million square feet has been delivered since late 2006 and 620,185 square feet is set to be completed in 2008 with a vacancy rate of 16.3%. Asking rental rates have maintained their values with class A asking lease rates at $2.97.
Central County concluded the first quarter with a vacancy rate of 14% and net absorption ended the year at negative 191,969 square feet.
North County continued to post increasing vacancy rates, moving upward to 14.1% in the first quarter, up from 11.1%. The submarket took a hard blow when Capital Group Cos. relocated to the Irvine Spectrum and ResMae Mortgage Corp. vacated.
Inland Empire
On the heels of a declining housing market, the office sector took its first negative absorption hit since the mid-1990s, the vacancy rate inched closer to 15%, sublease space rose and construction completions were met with slack tenant demand. With noticeable job losses in finance/real estate-related industries, and more expected to come, the 2008 outlook for the inland office looks bleak.
Housing foreclosures in the Inland Empire are the highest in the nation, up 240% in the past year, while home sales decreased close to 50% from one year ago. Population growth has also slowed, adding 27,340 fewer residents in 2007 than 2006. Retail sales are down and 7,300 jobs were lost in 2007.
In the first quarter, the vacancy rate increased to 14.6%. For the first time since the mid-1990s quarterly absorption was negative with 127,201 square feet. The impact is most clearly felt in the business districts of Ontario and Riverside, which comprise the majority of office space in the Inland Empire. Given that 2.4 million square feet in construction was added to the base during 2007,half of which still remains vacant,and with an additional 2 million square feet to come on line in 2008, the vacancy rate could surpass the 20% mark within the next 12 months. Activity has already slowed when considering that none of the 288,569 square added in construction completions during the quarter was leased.
The Inland Empire’s office market cycle will temporarily stall in attracting high-profile corporate users to towering mid-rises, via projects such as Corona’s Lakeshore Plaza and Ontario’s Airport Towers. Asking $2.80 and $2.65, respectively, their monthly rates are well above the market’s average class A rental rate of $2.19. But lower sublease rates and motivated landlords offering tenant improvement packages could attract some new tenants to the market.
To minimize losses, many builders will put larger developments on the backburner, while several current developments will be gradually phased in once 40% to 50% preleasing is recorded for planned buildings.
Los Angeles
For the second consecutive quarter the vacancy rate in the Los Angeles County office market went up, this time by 40 basis points, to 10.1%. The vacancy rate had remained in the single digits for nearly two years. Now absorption is again negative to the tune of 626,895 square feet. This is the first time in six years that there were back-to-back quarters with negative absorption.
Average rental rates have jumped about 30% in the past two years forcing many tenants to re-evaluate the amount of space they occupy and where they are located. The West Los Angeles submarket, in particular, has had the highest growth in rental rates increasing more 30% since 2007 and 58% since 2006. By the end of the first quarter nearly 4 million square feet of space was available for sublease or 21% of the total available space.
On the investment side of the market, the largest deal was the $610 million purchase by Douglas Emmett Inc. of a six-building Arden Realty Inc. portfolio. Buyers are going into a holding pattern. But the West Los Angeles market remains an island of desirability with deals still closing at about 5% capitalization rates.
Data and analysis by Grubb & Ellis Co.
