The national economy continues to face challenges, which has caused concern among several markets across the U.S., of which Orange County is not immune.
OC is expected to grow office employment by 12,600 jobs during the next two years, particularly in the office-services sector. Office demand is generated by two major employment sectors,office-using service employment, and finance and real estate employment, but each sector is unique in its effect on office demand.
Changes in service employment have been shown to have an immediate impact on office demand, as seen in the dot-com industry decline in 2001.
However, changes in finance and real estate employment, relevant to the current mortgage industry declines, may take up to two years to fully register its effects in the market, which most believe began in late 2006/early 2007.
Availability rates along with vacancy rates continue to edge upward as the office market strives to achieve a stable balance.
The office market continues to adjust to the shrinking concentration of mortgage and mortgage-related companies, which had buoyed the market during the past several years, while simultaneously reconciling this diminishing tenant base with newly constructed inventory.
Some 889,000 square feet was completed and delivered to the market in the first quarter with 44% of the space preleased at completion. With no new projects breaking ground in the first quarter, 671,155 square feet remain in the construction pipeline due to be completed this year.
The amount of available space in the market increased to 19.7% of total office space in the first quarter from 17.6% recorded in the fourth quarter, while the overall vacancy level increased to 14.7% from 12.8%.
Decreasing slightly from the previous quarter, about 12% of the vacant space is on the market for sublease, while the remaining 88% is for lease directly with the landlord.
The decrease in tenant occupancy resulted in 1.1 million square feet of negative net absorption. Average asking lease rates declined for the first time in five years from $2.78 to $2.72 per square foot.
Net Absorption
The OC office market experienced negative 1.1 million square feet of net absorption in the first quarter.
Approximately two-thirds of the negative absorption can be attributed directly to mortgage and mortgage-related companies.
The majority of negative absorption occurred in the greater airport area, totaling 652,498 square feet. Central Orange County experienced negative absorption of 226,354 square feet while South Orange County experienced only 58,276 of negative absorption, which was mainly offset by Pacific Life occupying 240,000 square feet in Aliso Viejo.
Vacancy
The overall vacancy rate for office space in OC experienced an increase, rising to 14.7% from 12.8% posted in the previous quarter. The greater airport area has the highest vacancy rate at 15.9%, which is the result of a combination of mortgage give-back space as well as newly constructed space.
South Orange County’s vacancy rate follows close behind at 15.4% which can also be attributed to new unoccupied space.
There is currently 19.6 million square feet of available space on the market, which includes space directly available for lease as well as sublease, and represents 19.7% of the total OC inventory.
Of the total available space, some 16.3 million square feet is available directly from the landlord, while the remaining 3.2 million is available for sublease.
Average Asking Lease Rates
The overall monthly average asking lease rates for office properties declined in the first quarter to $2.72 per square foot.
This lease rate represents a 6 cent escalation from the first quarter of 2007, which was at $2.66 per square foot. Class A asking rental rates decreased to $3.01 from $3.13 per square foot compared with the previous quarter. Class B properties experienced a 2-cent decline to $2.47, as well as class C properties to $2.07 per square foot.
North Orange County held steady at $2.40 per square foot, while Central Orange County declined 3 cents to $2.43 per square foot, and West Orange County decreased to $2.29 from $2.31 per square foot.
The average asking rental rate for all property types in the greater airport area now stands at $2.88 per square foot, representing a 10 cent decrease from the previous quarter. In South Orange County, the average asking rental rate is currently $2.76, which is down from $2.81 per square foot from the fourth quarter.
Construction
Following the completion of 4.2 million square feet in 2007, the first quarter saw a total of 888,912 square feet of construction.
The majority of newly completed projects is in South Orange County and includes multiple buildings offered for sale in the Jeffrey Office Park totaling 333,862 square feet.
In Aliso Viejo, one class A high-rise office building was completed, and it is now 100% leased and occupied by Pacific Life.
Jamboree Business Center, located within the greater airport area, completed three buildings, totaling 77,600 square feet each.
There was one new building added to North Orange County, an 82,250-square-foot low-rise property located in Brea which is currently 58% occupied.
Data and analysis by CB Richard Ellis Group Inc.
