Office Market:
Solid Vacancy Rates, Positive Absorption Highlight Rebound
Analysis provided by CB Richard Ellis’ Global Research and Consulting
The story of 2002: the start of a recovery in Orange County’s office market, with stabilized vacancy rates and gradually improving net activity leading the way.
Vacancy Rates
A big drop in construction activity during the year caused the vacancy rate for office space to stabilize at 15.8% vs. a year earlier.
Although total vacancy remained flat, the amount of vacant sublease space rose to nearly 1.9 million square feet, accounting for 13.2% of the total vacancy rate in the market, vs. 11.3% a year ago.
Absorption
Activity in the office market was primarily in the finance, insurance and real estate, healthcare and food industries, where employment posted moderate increases in the fourth quarter.
Fourth-quarter net absorption was a positive 421,864 square feet, marking the third consecutive quarter of gains.
Annual absorption was 883,098 square feet, a nice improvement from last year’s negative 844,043 square feet.
North County led the positive absorption in the fourth quarter with 221,645 square feet. CNA Financial Corp. accounted for about half of the absorption with a 10-year lease in Brea.
South County accounted for another 183,215 square feet of positive absorption in the fourth quarter, bringing that region’s annual absorption to 587,949 square feet.
Lease Rates
In 2001, landlords began lowering asking rents in a bid to retain and attract tenants as office vacancies rose.
But the decline was not as drastic as expected.
The average asking lease rate for office space dropped 18 cents,or 8%,to $2.04 per square foot per month at the end of the fourth quarter vs. a year earlier.
The greater John Wayne Airport area and South County, which typically boast higher asking rents than the county average, reported the largest annual decrease.
Each dropped 10% to end the year at $2.18 for John Wayne and $2.09 for South County.
The average asking rent for the Newport Center submarket slumped 28% to just below $3 per square foot in the fourth quarter, down from $4.15 per square foot at the end of 2001.
Construction
After four years of active construction, new building considerably slowed in the office and flex market last year.
That allowed some of the vacant first-generation space to be absorbed during the year.
Less than 1 million square feet remained under construction in the county at the end of the year.
Only 17 buildings were finished in 2002, adding 1.96 million square feet to the market.
About 1.2 million square feet,or 62%,of the year’s completions were speculative development projects.
Seventy percent of those were vacant at year-end.
Analysis provided by CB Richard Ellis’ Global Research and Consulting.
