The nation’s credit crisis continues to impact local businesses. The uncertainty of today’s financial markets is at the forefront of business decisions that companies are challenged with every day. Although the Orange County office market started to take a hit more than a year ago because of its exposure to the subprime mortgage industry, demand continues to be sluggish as tenants postpone real estate decisions until the U.S. economy reaches a relative balance. The recent historical presidential election has added to the decision-making time as the nation awaits an economic turnaround.
The office vacancy rate ticked up slightly in the third quarter to 15.4%, while the availability rate increased to 20.6%. The vacancy level increase can be attributed to the negative 392,000 square feet of absorption that occurred in the third quarter, mainly a result of financial institutions vacating space.
Tenants who have decided to consolidate or move out of their existing locations have added to the amount of space available for sublease. Accounting for 15%, or 3.2 million square feet of the total space on the market, available sublease space has increased 8% since the second quarter. The increased level of overall available office space has pushed asking rates down; the monthly rate dropped by 8 cents last quarter to $2.60 per square foot.
Now totaling 160,533 square feet, the amount of space under construction increased as one new building broke ground last quarter, adding to the 80,000 square feet already in the construction phase.
Office employment has been most impacted by the slumping economy, particularly in the financial sector, which has declined 11.9% in the past 12 months. OC, however, still has a diversified business base that could lead to overall employment growth during the next two years.
According to Torto Wheaton Research, part of CB Richard Ellis Group Inc., the business services sector is expected to grow by 7,700 jobs, which could offset the forecasted continued loss in the financial services sector. Overall, the short-term forecast for OC calls for positive growth in office workers through 2009.
Net Absorption
The office market saw a negative 392,319 square feet of absorption in the third quarter, bringing the year-to-date total to negative 1.5 million square feet. The majority of the occupancy change took place in Central County and the greater airport area, which reported a combined total of 642,589 square feet of negative absorption. Both of these areas contain the majority of mortgage-related companies, such as GE Capital Solutions, and continue to be impacted by the fallout of this industry. Washington Mutual Inc., which was recently acquired by JPMorgan Chase & Co., vacated about 100,000 square feet last quarter in Irvine prior to the acquisition.
To offset some negative absorption, a few notable deals did occur last quarter. In the airport office area submarket, Hyundai Motor Finance Co. leased about 96,000 square feet at 3161 Michelson in Irvine. In North County, Beckman Coulter Inc. signed a three-year lease for 89,000 square feet at 4150 Palm Street in Fullerton.
Vacancy
The overall vacancy rate for office space in OC saw a slight increase, ticking up to 15.4% from 15% posted in the previous quarter. Central County’s rate increased to 17.3% from 15.3% in the second quarter, produced from additional vacated space of mortgage companies. Conversely, North County saw a de-creased vacancy rate from 14.2% to 12.6%, which is a result of the area’s absorption occurring last quarter. South County also saw a decreased vacancy rate to 15.5% from 15.9%. West County saw an increased level of vacancy to 9%, and the greater airport area increased its vacancy level to 15.9%.
Average Asking Lease Rates
The overall monthly average asking lease rate for office properties declined 8 cents last quarter to $2.60 per square foot. Class A asking rental rates decreased to $2.88 from the $2.98 per square foot in the second quarter. Class B properties saw a 9 cent decline to $2.34, while class C properties decreased 3 cents to $2.04 per square foot.
Across the board, all five of OC’s major office areas saw decreased average asking rents.
Construction
In the third quarter, the OC office market added no new buildings to its inventory. A total of 1.4 million square feet was completed in the first half of the year, while an additional 80,000 square feet is expected to finish construction in the fourth quarter. In Central County, a four-story building in Santa Ana broke ground last quarter and will add 80,533 square feet to the inventory by late 2009. This newest addition brings the county’s under construction total to 160,533 square feet, which is down considerably from the 3 mil-lion square feet under construction a year
earlier.
Analysis by CB Richard Ellis Group Inc.
