The Orange County office market continues to feel effects of ongoing housing declines.
The amount of total vacant office space (vacant direct and vacant sublease space) increased in the third quarter and represents 10.8% of the total 96.7 million square feet of office space, while the market saw 800,147 square feet of negative absorption.
The overall unemployment rate increased to 4.1% from 3.5%, yet just slightly more than 2% of the total office employment is made up of housing-related companies.
Following a bankruptcy announcement from New Century Financial Corp. earlier in the year, the company vacated the majority of its existing space and consolidated into two locations in Irvine. The company recently terminated its lease at a newly constructed Irvine high-rise that it never occupied.
Impac Mortgage Holdings Inc. is also among the companies to layoff employees and reduce its office space. Impac has put its entire 200,000-square-foot headquarter space on the market for sublease, and also has vacated more than three quarters of its space.
After placing 600,000 square feet on the market for sublease last year, Ameriquest Mortgage Co. has recently vacated all of its space at City Parkway, which is being directly marketing by Maguire Properties Inc., the building’s owner.
The closing and consolidation of these and other subprime lending companies in addition to new construction has resulted in the increase of available office space.
Both availability (available occupied and vacant space) and vacancy rates have inched upward from the previous quarter, and are at levels witnessed in 2004. The amount of available space on the market increased to 16% in the third quarter from 13.9% recorded in the second quarter, while the vacancy level also increased in the third quarter to 10.8% from 9.1%.
Much of the mortgage “giveback” space has come back on the market as direct space rather than sublease, increasing the direct vacancy rate to 9.1%. The decrease in occupancy resulted in a negative 800,147 square feet, bringing the year-to-date total to more than 438,000 square feet of negative absorbed space.
There was more than 855,000 square feet of construction that opened, with 25% of the space pre-committed at completion. The remaining pipeline of new office space for 2007 totals 1.7 million square feet, of which 36% is preleased, while an additional 1.3 million square feet is expected to be completed in early to mid 2008.
Asking rents continue to rise as the average asking rental rate increased four cents to $2.77 per square foot in the third quarter, which is due to the new class A properties quoting higher rents than lower-priced existing space.
Net Absorption
The office market saw negative 800,147 square feet of net absorption in the third quarter. The absorption recorded in the quarter follows two quarters of relatively slow absorption and brings the 2007 total to negative 438,870 square feet. The greater airport area, which was probably hardest hit by the current subprime situation, posted 446,847 of negative absorption.
Vacancy
The overall vacancy rate for office space in OC rose to 10.8% from 9.1% posted in the previous quarter. This increased rate is comparable to the vacancy levels witnessed in the latter part of 2004, and fall below the rates recorded in 2002.
Vacancy rates in Central Orange County and the greater airport area, two areas that hold the greatest amount of mortgage company tenants, experienced increases in the third quarter to 9.4% and 12.9%, respectively. The vacancy increase in South Orange County, now at 10%, can be attributed to its newly constructed space.
There is currently 15.5 million square feet of available space on the market, which includes space directly available for lease as well as sublease, and represents 16% of the total space. Of the total available space, approximately 12.6 million square feet is available direct with the landlord, while the remaining 2.9 million is available for sublease with slightly less than half still occupied by the sublessor. Approximately 10.4 million square feet, or 10.8%, of the available space is currently vacant.
Average Asking Lease Rates
The overall average asking lease rate for OC office properties continues to rise and increased another four cents from last quarter to stand at $2.77 per square foot. This latest increase also represents a 16% escalation from the third quarter of 2006, which was $2.38 per square foot.
Class A rates also increased an additional four cents to $3.13 per square foot, while class B properties ticked up one cent to $2.49, and class C product climbed up six cents to $2.09 per square foot. These increases are due to the newly constructed space which is on the market at higher asking rents.
Of the market areas, the greatest increase was witnessed in the West Orange County area, which added 16 cents to end the quarter at $2.30. Central Orange County’s asking rent rose to $2.46 from $2.44 in the second quarter, while the greater airport area increased to $2.99 per square foot from $2.93, representing a six cent rise. North Orange County’s average asking rent declined five cents to stand at $2.39 per square foot.
Construction
Construction of 855,044 square feet was completed in the third quarter, bringing the total OC office space to nearly 96.7 million square feet, and leaves 3 million square feet in the construction phase.
The majority of the newly completed space is in the airport office area submarket, and includes two high-rise buildings in the city of Irvine totaling 761,558 square feet. One of the buildings, at 3161 Michelson Ave., totals 530,380 square feet and is about 32% full with tenants such as Gibson, Dunn, & Crutcher LLP and Greenberg Traurig LLP.
A total of six class B low-rise properties were completed at the Towne Center Office Park in Foothill Ranch. Buildings in this park range from 5,000 to 19,000 square feet and add another 53,486 square feet to the South Orange County market. The Astronautics Corporate Plaza, in Huntington Beach, also added a class B low-rise office totaling 40,000 square feet.
Analysis provided by CB Richard Ellis Research Group Inc.
