For the past year, businesses and individuals have been affected by the uncertainty surrounding the local, national and world economies. The National Bureau of Economic Research declared the United States to be in a recession, which officially began in December 2007. The weakening of employment throughout 2008 was a main reason for the declaration.
Orange County felt much of this economic downturn as the office market was significantly affected in late 2007, when the subprime mortgage industry began to collapse.
OC’s large concentration of mortgage-related workers has shined a bright spot on the region’s employment outlook for 2009, as the county’s skilled labor base provided the impetus for the Federal Deposit Insurance Corp. to lease 200,000 square feet in Irvine. The FDIC will hire 600 non-permanent employees and contractors to manage receiverships and to liquidate assets from failed financial institutions primarily located in the Western U.S.
Employment of OC’s office workers has declined 5.1% during the past 12 months and is expected to shed an additional 20,300 jobs in the next year according to Torto Wheaton Research, a unit of CB Richard Ellis Group Inc., with the majority of the job losses in the financial services sector.
A modest gain of overall employment may be seen in late 2009; however, most economic indicators point to a 2010 recovery.
The OC office vacancy level remained stable last quarter, moving slightly to 15.5% from 15.4% in the previous quarter. In comparison, the county’s overall availability of office space increased to 21.4% from 20.6% for the same time period. The minimal rise in vacancy can be attributed to a moderate 66,000 square feet of negative absorption that occurred last quarter. This brings the year-to-date absorption total to negative 1.6 million square feet, the majority of which was recorded in the first quarter of the year at the start of the recession.
Although there is a continued trend of tenants deciding to consolidate or move out of their existing locations, the amount of sublease space in the county only grew by 0.1% during the fourth quarter, while the amount of vacant sublease space declined by 6.6%. The increase of available office space remains the key factor for the continual decline in asking rents during the past year. In the fourth quarter, the average monthly asking rent decreased by 8 cents to $2.52 per square foot.
Office space under construction remains minimal, with about 204,000 square feet in the construction phase targeted for completion in 2009. During the fourth quarter, two buildings totaling 95,000 square feet were added to the county’s overall office inventory.
Net Absorption
The OC office market saw 65,597 square feet of negative absorption in the fourth quarter, bringing the year-to-date total to negative 1.6 million square feet. The majority of the negative absorption took place in the greater airport area, which continues to feel the effects of the fragile financial markets and reported 252,463 square feet of negative absorption.
This negative absorption was offset by 67,755 square feet of absorption in North and Central counties as well as 125,543 square feet in South County. The most notable deal that occurred last quarter was the FDIC lease for approximately 200,000 square feet at 40 Pacifica in the Irvine Spectrum. This three-year lease brings Irvine Company’s recently completed 624,000-square-foot Pacifica Office project to more than 50% full.
Vacancy
The overall vacancy rate for office space in OC saw a minimal increase, ticking up to 15.5% from 15.4% posted in the previous quarter. Three of the five submarkets actually saw a decline in vacancy. North County’s vacancy level declined to 12.1% from 12.6%, while Central County decreased to 17.1% from 17.3% and South County now stands at 15.1%, down from 15.4%. The other two submarkets, West County and the greater airport area, saw increased levels of vacancy to 9.1% and 16.5%, respectively.
Average Asking Lease Rates
The overall average monthly asking rental rate for all OC office properties declined an additional 8 cents in the fourth quarter to $2.52 per square foot. Class A asking monthly rental rates decreased to $2.77 from $2.88 per square foot in the third quarter, while class B properties saw a 4 cent decline to $2.30 per square foot and class C properties also decreased 4 cents to $2 per square foot.
With the exception of West County, which posted a 5 cent increase to $2.24 per square foot, the other four submarkets saw a decrease in their average monthly asking rents. North County shed 1 cent to stand at $2.27 per square foot, while Central County declined 4 cents to $2.23 per square foot. The average asking rental rate for all building types located in the greater airport area decreased 13 cents to $2.68 per square foot, while South County dipped 7 cents to $2.54 per square foot.
Construction
In the fourth quarter, the OC office market added two buildings to its inventory, bringing the 2008 total to 1.5 million square feet of new construction. The recent additions included two class B buildings consisting of a 40,000-square-foot building in the greater airport area and a 55,000-square-foot building in South County. One additional class B property broke ground last quarter, bringing the current total under construction to 204,033 square feet. New construction of office space is down considerably from the 1.6 million square feet under construction just one year earlier.
Analysis by CB Richard Ellis Group Inc.
