DEAL BAROMETER
Tenants Continue to Hold Upper Hand, Though Shift Seen
Tenants continue to enjoy favorable conditions in the Orange County real estate market, though signs of a tightening market are emerging.
Rental rates have remained relatively unchanged in the past 12 months and don’t appear to be responding to the declining availability rates in most of the county’s submarkets during the past quarter.
The continued upswing in occupancy does indicate that the office market is tightening, but not necessarily improving, from a landlord’s point of view.
Even for class A space, which has shown the greatest decline in its availability rate, rents have remained relatively flat. Leasing still remains challenging for owners and most continue to offer attractive packages to fill space.
Rental concessions remain on an upward trend as the market is seeing a pickup in free rent and reduced initial rental rates. On the positive side for landlords, there was a reported drop in defaults during 2003.
Probably the most significant statistic is the decline of contiguous blocks of space of more than 50,000 square feet, as companies snatch up space while rates remain at such low levels.
The first quarter showed 13 blocks available, down 24% from the previous quarter and 52% from the same period a year earlier. Because of this dramatic reduction, rental rate appreciation is expected in the large blocks first.
Availabilities Decline
The overall availability rate for Orange County was 18.4% in the first quarter, down about 1% from the previous quarter.
Though only a modest decline from the fourth quarter, the class A availability rate dropped more than 6% to 17%. However, the availability rate for other classes of space declined by less than 3% in the past year, highlighting the ongoing tenant migration to higher-quality space.
The overall rental rate for the first quarter was $19.12, down 7 cents from the previous quarter. In the past year, Orange County rental rates have seen a significant drop, declining by $1.12,or 16%,from the first quarter of 2003.
Class A rental rates have remained relatively unchanged at $23.91 in the first quarter, down only three pennies from the previous quarter and off a modest 8 cents from the same period a year earlier.
South County (21.8%) and the John Wayne Airport area (20.5%) had the highest availability rates in the first quarter. Both areas still have a large amount of sublease space, which is a contributing factor in keeping availabilities so high.
First quarter results for North County outperformed the other submarkets compared to a year earlier. North County not only posted a 70-cent, or 4.2%, increase in rents compared to the same quarter last year, but also was able to drop availabilities by 5.4% to 12.2%.
Leasing on Hiatus
Overall leasing activity for the county was down 16% in the first quarter, versus the same period a year earlier. Although class A activity declined by almost 18% from year-ago levels and 32% from the previous quarter, it still accounted for almost 64% of the county’s leasing activity for the first quarter.
Leasing activity was strongest in the airport area, which accounted for almost half of the activity for the quarter.
Healthy Local Economy
In January Orange County’s unemployment rate was 3.5%, well below the national average. The county’s employment base grew by more than 17,000 jobs in the past year.
However, manufacturing remained a soft spot in the local economy, losing about 4,000 jobs in the period. In contrast, office-related employment posted encouraging gains, growing by about 10,000 in the past 12 months.
Cap Rates Trail Nationally
Office capitalization rates during the fourth quarter were 8.5% in Orange County, while national rates averaged 9.2%.
Orange County continues to be a tenant’s market. Though the recovery is slow to take effect, long-term prospects remain positive as the area is a central business hub.
The lack of upward movement for rental rates inevitably will come to an end. Tenants would do well to closely monitor the changing dynamics for the rest of the year.
Data and analysis provided by Studley.
