ORANGE COUNTY
In the past three years, Orange County’s economy has created one of the healthiest, most diversified office markets in the country.
With few exceptions, OC is balanced for continued long-term growth. New small businesses are being formed every month, and, so as long as this continues, these businesses will be the engine that powers OC through its current plateau and into growth.
The market experienced a slowdown in the third quarter brought on by an influx of construction and fallout in the financial services, mortgage and real estate-related industries. The anticipated short-term correction is forecasted to push vacancy rates from 9% to 12% by the end of the year. Though vacancy rates are anticipated to reach the low teens, these rates are still below the 13.4% seen in 2001 after the implosion of the dot-com industry.
Tenants seem uncertain about making real estate decisions, while landlords are aggressively trying to fill vacant space. Due to a general feeling of economic ambiguity, many tenants, regardless of size, have opted to renew leases on a short-term basis.
INLAND EMPIRE
Substantial preleasing of new buildings pushed absorption values well past the threshold recorded one year ago, as companies such as Wells Fargo Home Mortgage and Kaiser Foundation Health Plan occupied new space.
But in a market where many tenants have links to the declining housing market, does this absorption boost reflect the office sector’s current vitality, especially when 2.8 million square feet is under construction?
If the question is one of maintaining equilibrium between supply and demand, then the Inland Empire is, for now, on the right track.
The region has realized noteworthy white collar job gains. In a national climate where 129,927 finance-related jobs have been shed since January and OC mortgage and subprime companies are downsizing their operations, the Inland Empire has added 2,000 finance positions in the past 12 months.
However, the local office sector’s long-term vitality will be determined once a new wave of tenants,for-profit schools, scientific and technical businesses, among others,vie for market share, and bolster future absorption levels. Developers, ever cautious in the economy’s changing visage, will, in turn, pace groundbreakings until ample preleasing has occurred for initial project phases.
LOS ANGELES
With the Los Angeles County Economic Development Corp. forecasting a 1.5% increase in employment in Los Angeles County for 2008, the local economy looks to be on a stable moderate track. Stumbling blocks for both the Los Angeles and the national economies seem to be stemming from the housing slowdown and the credit crunch, the effects of which have rippled across industries and markets.
The office market in Los Angeles County, however, has not seen such a slowdown, with vacancy rates and asking rates quickly moving in opposite directions. The third quarter ushered in higher asking rates across the board throughout Los Angeles County. Class A asking rates increased 6% from the second quarter and an astonishing 18% from the prior year.
The trend was similar for class B asking rates, which increased 6% from the prior quarter and were up 12% from last year. The fundamentals in the office market remain healthy and the market tight as vacancies declined coupled with the increase in asking rates. The vacancy rate hit 9.2% at the end of the third quarter, a drop of 20 basis points over the prior quarter and 60 basis points over the prior year. Net absorption totaled a healthy 919,136 square feet, bringing the year-to- date total to more than 1.7 million square feet.
Analysis by Grubb & Ellis Co.
