Although at a slower economic pace than last year, Orange County’s core fundamentals such as a diverse economy, highly educated workforce and deep international trade links has kept the office market solid. The economic slowdown can be directly attributed to cutbacks in the housing and mortgage lending industries leading to slower job growth in recent months. Yet, the unemployment rate for Orange County remains low at 4.1%, and positive job growth is expected through 2008. While the overall vacancy rate increased to 9.4%, the office market experienced a positive 39,185 square feet of net absorption in the second quarter.
Although the county’s office market has endured a continuation of the shrinking mortgage industry, it seems to be weathering through this subprime storm. However, the impact from these companies has led to increased availability and vacancy levels. The amount of available space on the market increased to 14% in the second quarter from 12.5% recorded in the first quarter, while the overall vacancy level also increased in the second quarter to 9.4% from 8.3%.
Demand from expanding and startup tenants offset space vacated by the mortgage companies, resulting in 39,185 square feet of net absorption, bringing the year-to-date total to more than 261,000 square feet.
The average asking rental rate increased to $2.73 per square foot, representing a 7 cent climb from the first quarter. There was more than 1.3 million square feet of construction finished, with 57% of the space already spoken for at completion.
The remaining pipeline of office projects for 2007 totals 2.7 million square feet, of which 32% is preleased, while an additional 506,000 square feet is expected to be completed in early to mid-2008.
Net Absorption
In the second quarter, OC’s office market registered a lower volume of absorption. There was 39,185 square feet of space absorbed this quarter, which brings the total to 261,912 square feet. Although the greater airport area posted a relatively flat 3,707 square feet of negative net absorption, the majority of the notable transactions taking place this quarter occurred in this submarket, concentrated in low-rise class B properties.
Vacancy
The overall vacancy rate for office space in OC rose to 9.4% from 8.3% the previous quarter. Vacancy rates in Central County and the greater airport area, which hold mortgage company tenants, experienced vacancy increases in the second quarter to 8.9% and 10.3%, respectively. The vacancy jump in South County, now at 9.7%, can be attributed to its newly constructed space.
There was 13.5 million square feet of available space on the market, which includes space directly available for lease as well as sublease, and represents 14% of OC’s total space. Of the total available space, 2.7 million square feet is available for sublease with slightly less than half still occupied by the sublessor.
Average Asking Lease Rates
The overall average asking lease rate for office properties increased 7 cents from the first quarter to $2.73 per square foot. This latest increase represented a 17% rise over the second quarter 2006 total of $2.34 per square foot.
Class A rates increased an additional 6 cents to $3.09 per square foot, while class B properties ticked up 10 cents to $2.48, and class C buildings dropped 1 cent to $2.03 per square foot.
Of the market areas, the greatest increase was seen in the Central County area, which added 27 cents to end the second quarter at $2.44. North County asking rent rose to $2.44 from $2.36 in the first quarter, while the greater airport area increased to $2.93 per square foot, representing a 6 cent rise. West County’s average asking rent declined 1 cent to $2.14 per square foot.
Construction
Construction of 1.3 million square feet was completed in the second quarter, bringing OC’s total office market to more than 96 million square feet with 3.4 million square feet still in the construction phase.
The majority of newly completed space is in the greater airport area, which includes a green building at 2211 Michelson.
The remaining four buildings at University Research Park also completed construction, which totaled 385,728 square feet. Pacific Office Plaza completed construction of two low-rise office buildings, which increased the city of Tustin’s inventory by 66,980 square feet.
The Irvine Spectrum submarket, added more than 437,000 square feet to the market.
Analysis provided by CB Richard Ellis Group Inc.’s research unit.
