A flurry of large lease deals wasn’t enough to stem the tide for Orange County’s office landlords, who saw rents fall and overall leasing remain slow in the fourth quarter, while empty space continued to climb.
The average monthly asking rate for the county’s office market, which totals about 108 million square feet, was $2.47 per square foot at the end of 2008, according to the Irvine office of Voit Commercial Brokerage LP.
That’s down nearly 11% from a year earlier. Rents fell 14 cents, or about 5.3%, in the fourth quarter alone as landlords moved beyond offering steep tenant improvement concessions and began slashing rents.
Last quarter was the steepest drop in quarterly rents OC’s seen in more than a decade.
“That’s the biggest thing that stands out” in the fourth quarter office market data, said Jerry Holdner, vice president of market research for Voit.
What a difference a year makes: The $2.77 per square foot average rent seen at the end of 2007 was a record high for the county, according to Holdner.
Now, tenants are signing deals at rates comparable to those seen in mid-2006,or lower, factoring in concessions.
“The next six months is a great time for a tenant to negotiate a long-term lease,” Holdner said.
Voit’s year-end figures show OC ending 2008 with a vacancy rate of 15.2%. That’s an increase of 24% from the vacancy levels of a year ago, and nearly double rates seen here two years ago,prior to the implosion of the mortgage industry and completion of several office towers.
On the upside, vacancy rates at the end of 2008 were only up about 2% from the end of the third quarter, according to Voit’s data. The brokerage tracks office buildings larger than 25,000 square feet; other researchers put the area’s vacancy rates closer to 16% or 17%.
Don’t expect a turnaround until mid-2009 at the earliest, said Holdner, who predicts vacancy rates will rise at least another point during that time.
The heads of other local brokerages, such as Santa Ana-based Grubb & Ellis Co., are predicting OC’s office vacancy rate will top out at more than 20% before recovering in the next year or so.
20%-Plus Space Available
Some say OC already is there with some 22% of the county’s office space available for lease when factoring in sublease space. That’s a year-over-year increase of nearly 28% in OC’s availability rate, according to Voit.
“There’s still a significant amount of sublease space on the market, but most of that is for less than two years,” said Randall Parker, managing director for the Newport Beach office of tenant brokerage Travers Realty Corp. “Once you peel (the data) back, you’ll see most of it is not always the perfect opportunity.”
Big Subleases
A few big sublease deals were struck in the fourth quarter.
Most notably, subprime auto lender Consumer Portfolio Services Inc., which had been based in the Irvine Spectrum, moved its headquarters to nearly 100,000 square feet of space previously used by Impac Mortgage Holdings Inc. in Irvine.
Other office deals topping 100,000 square feet announced last quarter include a 181,000-square-foot lease for Irvine-based Taco Bell Corp., as well as the 200,000-square-foot lease for the Federal Deposit Insurance Corp. at Irvine Company’s 40 Pacific tower in the Spectrum.
Seventh Straight
Those transactions weren’t enough to keep OC from recording its seventh straight quarter of negative absorption.
There was 1.6 million square feet of negative absorption in 2008, more than double the amount seen in 2007, as most tenants opted to renew existing leases rather than move to larger offices.
“There’s a lot of paralysis in the marketplace,” Parker said. “I don’t see that changing for the first half of 2009.”
Good News
Irvine Co., the area’s dominant landlord, said that not all signs in the marketplace are negative.
Surprisingly, 2008 was the best year in the history of the landlord in terms of sheer volume of office leasing, according to Steven Case, senior vice president of leasing for Irvine Co.’s office properties.
“In the second half (of 2008) alone, we leased 3.6 million square feet. The companies are large and small. Some are startups (and) others are brand-name leaders,” such as Broadcom Corp., Blizzard Entertainment Inc., Fluor Corp., Cisco Systems Inc. and La Jolla Group, Case said.
Next year could be a “year of healing” for the office market, although for tenants with wiggle room, there are plenty of opportunities to drive a good deal, Parker said.
“There hasn’t been a better time to be tenant” in the past 15 years, Parker said.
