Orange County
The Orange County office and flex-tech markets initiated the new millennium by surging well beyond expectations. During the first quarter of 2000, vacancy dipped, lease rates increased, and absorption skyrocketed. Post-Y2K optimism and the stubbornly successful economy have injected new life into a market that had reached a plateau during 1999. In fact, positive economic fundamentals, both on a national and local level, have sustained the longest period of expansion in U.S. history. During the fourth quarter of 1999, GDP (Gross Domestic Product) grew 6.9%, and is expected to expand an additional 5.0% during the first quarter of 2000. Fortified by low unemployment, rising salaries, and all-time highs in consumer confidence (sales of cars and light trucks in 1999 broke the previous record set in 1986), traditional office-based companies are flourishing. Recovering Asian economies pushed exports at the ports of Long Beach and Los Angeles up 8.5%, while imports soared 18.7%. Additionally, according to the U.S. Census Bureau, Orange County was No. 7 in the U.S. for population growth in 1999. Despite this growth, the local unemployment rate continues to be the lowest in Southern California, at 2.3%. Finally, Orange County witnessed a 31.3% decrease in foreclosures during 1999, further indicating the financial health of the local economy. Positive economic indicators such as these continue to inspire confidence and healthy performance in the Orange County office market.
Statistics from the first quarter of 2000 reinforce the happy story of the healthy Orange County office market. In the midst of nearly 4.5 million square feet of combined office and flex-tech construction, vacancy rates declined across the board. Office vacancy tightened from 10.1% to 9.5%, while flex-tech vacancy plunged from 23.6% to 19.0%. Strong pre-leasing has enabled many new speculative projects, like Lakeshore Towers II and buildings in the University Research Park, to come on line almost fully occupied. Second-generation opportunities, such as the Park Place facility in Irvine, have enjoyed equally impressive activity. The persistent demand is best evidenced by the particularly impressive first-quarter absorption figures. Together, the Orange County office and flex-tech markets combined to fill more than 1.1 million square feet of vacant space. Office market absorption, of 680,000 square feet, reached its highest level since the second quarter of 1997. Not to be outdone, the flex-tech market absorbed almost 10% of its entire inventory. Newly completed and pre-leased buildings enabled the Airport Area and South County submarkets to post enviable net absorption gains. The Central County submarket enjoyed similar gains from an ever-increasing influx of tenants looking to escape rapidly rising lease rates in neighboring submarkets. The average lease rates in the county rose to $2.04 (full-service gross) for the office market, and $1.43 (triple-net) for flex-tech space. The Airport Area accounted for most of these increases, with rates rising 5 cents for office space and 6 cents for flex-tech space.
New development in the flex-tech market continued to increase during the first quarter. More than 2.1 million square feet of product was under way at the quarter’s end, with more than 1 million square feet under construction in the Airport Area alone. Frenzied development has increased the total flex-tech inventory by nearly 100% in the past 18 months, and promises to remain steady throughout 2000. The office market observed a temporary decrease in construction in the first quarter to 1.5 million square feet, as several projects reached completion. Additional projects, such as Nexus Twin Towers in Santa Ana, are on the horizon.
In short, after a strong yet stable year in 1999, the Orange County office and flex-tech markets exploded in the first quarter of 2000. The economy has injected tenants and developers alike with a bullish attitude that has stimulated demand across submarkets and product types. Absorption swelled, vacancy rates declined, pre-leasing of new product remained strong and lease rates continued their ascent.
In the next six months, pre-leasing of the more than 3.6 million square feet of new construction that is under way will be a good barometer of continued market health. Look for absorption to hit 750,000 square feet in the second quarter, while vacancy rates waver with the completion and leasing of new product. As a result, lease rates, particularly in the Airport Area and South County, will slowly increase. Construction will remain fairly constant throughout the year, with upcoming high-rise development from Koll, Opus, and Nexus in the Airport Area. Sustained economic success should support demand and help absorb the new space. However, inflationary pressures and rising interest rates loom on the horizon, lending a measure of uncertainty to an otherwise booming marketplace.
Los Angeles
The Los Angeles County office market vacancy rate continues to drop,the average rate for all of the county’s 160 million square feet of space was 13% in the first quarter, down a full point from an average rate of 14% one year ago.
Vacancy reductions were most dramatic in the South Bay and West LA markets. The South Bay benefits by virtue of surplus office space at relatively affordable lease rates. The sizzling West LA market has a rock-bottom vacancy rate coupled with strong and growing demand for office space.
New development is occurring at a moderate pace in the county’s office markets. At the close of the first quarter there was a total of 2.9 million square feet of new office space under construction. New office product is being developed in the West LA, Tri-Cities, and LA North markets. Rapid absorption of new space is expected because strong demand has been evidenced in pre-leasing activity.
The strong demand for office space has sent lease rates climbing. Average asking rates for Class A office space in Los Angeles County went up 6% across the board from the first quarter of 1999 to the first quarter of 2000. Class A rates increased most dramatically in the San Gabriel Valley, where they were up by 11%, and West LA, where they were 7.8% above the prior-year average. Rates were least changed in the South Bay, where the increase for the year was 2.4%, and Wilshire Center, where Class A rates remained flat in the year-over-year comparison.
Other Areas
In Bakersfield, investment interest continues to be solid for office and retail properties. The Abbey Co.’s acquisition of Ming Office Park is the first of a $20 million portfolio target for the greater Bakersfield area. New construction continued in the central business district, with the five-story UC Merced/Kern County Superintendent of Schools campus and 9100 Ming Avenue in the University Centre submarket both by The Allen Group. New medical office construction remains very strong in the suburban markets, as well.
In the Inland Empire, Riverside and San Bernardino counties, construction momentum continued strong into first quarter. As many as nine new buildings are scheduled to hit the market this year, with six having broken ground already. To date, the pre-leasing activity has been moderate, with only one building indicating strong pre-leasing interest. Most developers are counting on the strong local, regional and national economy to drive demand. These positive economic factors, combined with the lack of large blocks of contiguous space, is prompting the recent building.
San Diego’s office market continues to benefit from the growth of the high-technology industry, experiencing strong absorption and a steady decline in vacancy rate. The vacancy rate, which at one point remained at 10% for seven consecutive quarters, has continued it’s more recent descent to the 7% level. With 17% pre-leasing in the limited amount of new speculative space under construction and continued strong demand from tenants, the rate is expected to continue its decline in the next six months.
