The office market took a breather last quarter.
Vacancy rates reversed course and grew 13% in the second quarter to 6.8%, according to the latest market data from CB Richard Ellis Group Inc.
That’s still well below the 8.3% vacancy rate seen just a year ago. And the county’s office market still is strong with growing jobs and limited new space.
“We’re still among the best markets in the country,” said Ted Snell, senior vice president for the Newport Beach-based office of CB Richard Ellis.
But the second-quarter numbers represent the first rise in vacancy rates in some time, though it was unlikely they could have gone much lower. The 6% vacancy rate seen at the end of the first quarter was the lowest seen in Orange County.
Net absorption for the year now stands at 167,000 square feet, after tenants vacated about 527,000 square feet of space in the second quarter.
The well-publicized downsizing in the mortgage industry was not the main culprit for the uptick, said Barry Katz, managing director of CB Richard Ellis’ office specialty group.
The parent company of Orange-based Ameriquest Mortgage Co. has put 600,000 square feet of sublease space on the market, most of it in Irvine.
Other mortgage companies, including Orange’s Acoustic Home Loans, Newport Beach-based Impac Mortgage Holdings Inc. and the local operation of E-Trade Financial Corp., have put close to another 400,000 square feet up for sublease.
Those companies still are trying to sublease the space, so it isn’t showing up as vacant, Katz noted.
“No huge blocks (of space) are coming up,” he said. “It’s just smaller blocks across the board,20,000 square feet here, and 40,000 square feet there.”
The effects have been most pronounced in the area around John Wayne Airport. Vacancy rates there grew 24% in the past quarter, to 7.2%. The airport area posted a vacancy rate of 8.7% a year ago.
Rental rates in the airport area, the most expensive part of the county, also took a small step backward in the past quarter. Average rents there fell a penny to $2.48 per square foot, according to CB Richard Ellis.
The best space in the airport area still is going for upward of $3 per square foot. And there are no indications that those rents are doing anything but going higher, Katz said.
“It’s very hard to find good space around $2.50,” he said.
Rents continued to rise across the county. The average rental rate is $2.34 per square foot, up five cents from last quarter and up 11.4% from a year ago.
Central OC had the highest vacancy rates in the second quarter, at 7.9%. South County was the tightest submarket at 5.6%, according to CB.
Kimco Picks Up Centers
Close to 1.6 million square feet of shopping center space in OC is changing hands.
Kimco Realty Corp., a New Hyde Park, N.Y.-based real estate investment trust with about 1,100 shopping centers to its name, said last week it plans to buy Pan Pacific Retail Properties Inc. for $2.9 billion in cash and stock. Kimco’s set to take on an additional $1.1 billion in Pan Pacific debt.
San Diego-based Pan Pacific owns 138 shopping centers, primarily in California. They total about 22.6 million square feet and are 97% full. Locally, Pan Pacific counts eight OC centers.
Larger local holdings include the 346,000-square-foot Anaheim Plaza, the 271,000-square-foot Fullerton Town Center, the 211,000-square-foot Larwin Square Shopping Center in Tustin and the 209,000-square-foot Pavilions Place in Huntington Beach.
Argus Checks Into Hotels
San Clemente’s Argus Realty Investors LP is taking a vacation from the office market.
The company, which pools together investors for office buys, formed a division focused on the hotels.
Argus’ hospitality group plans to buy and develop hotels, hotel condominiums, resorts and country clubs in the U.S. and in Mexico and the Caribbean.
The group is being led by managing director Rick Vesci, a former director of resort operations for Prudential/Ryness Co. and a onetime real estate adviser to Carlsbad’s Four Seasons Residence Club at Aviara.
The group plans to follow the investment model set by Argus, Vesci said. Deals will run from $20 million to $100 million, with investors kicking in about 30% and the company financing the rest.
One local deal could break the $100 million mark. A hotel condominium project here in OC could be the largest tenant-in-common deal Argus has done, costing several hundred million dollars, Vesci said.
Other projects in the works include a horse resort in San Miguel de Allende, Mexico, a resort north of Puerto Vallarta, and a ski resort in Deer Valley, Utah.
Argus has pulled in some big profits for some of its office deals. One recent sale in Santa Fe Springs just pulled in a 57% annualized return in 28 months.
“It will be hard to replicate those returns,” Vesci said.
A more likely return for hotels is in the 8% range, he said.
