Orange County’s office market took another tumble in the second quarter with rents declining as businesses continued to shed space at an alarming rate.
The area’s office market, which totals about 107 million square feet of space, saw rents fall 3% in the second quarter compared to the first, according to a survey of local brokerage data.
Monthly rents,which now average about $2.30 per square foot to $2.60 per square foot for higher-end buildings,are off nearly 15% from a year ago. Rents are down close to 18% from the 2008 peak of OC’s office market.
At the same time, businesses here shed nearly 1 million square feet more space than they leased in the quarter, continuing a trend of negative absorption that’s been ongoing since 2007.
Factoring in empty space that’s available for sublease, OC’s office market now counts an availability rate close to 25%, according to data from the local offices of Santa Ana-based Grubb & Ellis Co., leaving little hope for an uptick in rents.
Good News
That’s good news for tenants looking for an upgrade in space.
“It’s a historic time” to be a tenant in OC, said Royce Sharf, executive vice president for the Irvine office of brokerage Studley Inc. “We’re seeing transaction terms we never thought were possible.”
The market has a ways to go before it bottoms out, especially if OC continues to shed jobs, Sharf said.
The brokerage is expecting negative trends to continue through the end of 2009, as well as next year.
Other commercial real estate watchers hope owners’ pain is beginning to subside.
The market remains tough, but leasing activity is picking up, said Kurt Strasmann, managing director of OC brokerage operations for Grubb & Ellis.
On average, Grubb & Ellis’ OC brokerage offices had been completing about 50 to 60 deals per month during much of the past year with the typical lease being about 5,000 square feet.
Last quarter, the number of leases ramped up to about 90 deals per month, according to Strasmann.
“My overall perspective is that the slow-est portion of the market is behind us,” he
said.
Strasmann still expects rents to fall another 5% to 10% by the end of the year.
“Pricing is still very difficult for landlords to deal with,” he said.
Studley figures show that landlords are feeling pain well beyond declining rents. Factoring in a 33% increase in tenant concessions during the past year, landlords are effectively seeing a 25% decline in their rents from a year ago once all is said and done, the brokerage reports.
Tenant concessions now routinely exceed $40 to $50 per square foot for a 10-year lease, according to Sharf (see related story, page 22).
Buyers
The pressures facing local landlords haven’t stopped buyers from entering the market,assuming they can get a deal at a fraction of the price seen a few years ago.
Nearly 1.5 million square feet of office space sold last quarter, up from 200,000 square feet in the first quarter of the year. It was the highest level of sales activity seen here since the third quarter of 2007, according to Newport Beach-based Voit Real Estate Services.
Another 1.5 million square feet of space is likely to trade hands by year’s end.
Notable properties on the market include the former headquarters of Downey Financial Corp., which has a price tag of about $59 million, and the 314,000-square-foot tower built in Irvine by Phoenix-based developer Opus West Corp.
Last week, Opus West, which filed for Chapter 11 bankruptcy earlier this month, placed up for sale about 50 properties it owns directly or through special purpose entities.
The Opus Center Irvine III tower, which opened in 2007 and is 34% full, has about $81 million of debt tied to it, according to the developer’s marketing materials. A sales price was not disclosed.
