Positive Absorption Returns as Lease Rates Fall
Construction of one-, two- and three-story properties has been rampant in the past three years. Since the beginning of 1998, more than 9 million square feet of low-rise space, including flex space, has been added to the Orange County office market. Nearly 340,000 square feet of first-generation space was delivered in the third quarter of this year, including one building at the Brea Corporate Park, two at the Foothill Plaza campus of Foothill Ranch, and one more at the Pacific Commercentre in Lake Forest.
At the beginning of 2001, the continuing tech decline and tightening economy caused a slowing of activity in the office market, resulting in an oversupply as new construction was completed. Thus, the low-rise market experienced negative net absorption and increasing vacancy rates. During the third quarter, however, the low-rise office market rebounded with more than 155,000 square feet of positive absorption. South Orange County experienced the highest absorption in the county, and most of the positive activity there occurred in buildings completed this year or last. The positive net absorption of the third quarter dropped the vacancy rate in the low-rise market to 12.5% from 12.9% in the second quarter.
To encourage activity during the time of economic uncertainty, many office landlords have begun lowering asking rents, which had reached an all-time high at the end of 2000. The average asking lease rate for low-rise space fell 3 cents in the third quarter to $2.04 per square foot per month, yet remained 2 cents higher than the average in the third quarter of 2000.
Despite a looming oversupply problem, development of approximately 1.8 million square feet of low-rise office space continued through the third quarter. Four new low-rise projects broke ground in the third quarter, including Phase II of the Fairway Center in Brea, a two-building campus in Cypress, Phase II of Alton Corporate Center in the Irvine Business Complex submarket, and the Arbours Office Campus in Rancho Santa Margarita. In addition, a complete rehab of the Newport Technology Center buildings began in the third quarter.
Analysis provided by CB Richard Ellis’ Global Research and Consulting.
