The OC Office Market
After five years of steady and sometimes explosive growth, the Orange County office market showed signs of settling during the first quarter.
Vacancy Rates
The vacancy rate for office space rose in the first quarter of 2001 to 11.2%, up from 9.6% at the end of last year. Construction activity was the major contributor to the vacancy increase as nearly 80% of the new construction in the first quarter entered the market unoccupied, adding more than 500,000 square feet to the vacancy. Without this new construction, the vacancy rate for office space in Orange County would have reached only 10.6% in the first quarter. An increase of sublease space in the market also played a part in the overall vacancy rate spike. During the first quarter, the amount of vacant sublease space in the county increased by approximately 389,000 square feet. As a result, sublease vacancy accounted for 12% of the overall vacancy rate in the first quarter of 2001, as opposed to 9% in the final quarter of last year.
Absorption
Movements of two large tenants into new construction contributed greatly to the first quarter’s negative net absorption. The tenants, Verizon Wireless and Western Digital, moved their operations into newly constructed projects in South Orange County last year.
However, residual movements from Verizon’s previous locations, and the expired lease obligation of Western Digital’s previously occupied space in the first quarter dumped 187,000 and 366,000 square feet onto the market, accounting for 74% of the negative absorption.
A 25% increase in vacant sublease space supplied the bulk of the balance, which brought total net absorption for the first quarter down to a negative 750,691 square feet.
Lease Rates
The average asking lease rate for office space continued to rise in the first quarter of 2001, however at a slower rate than in previous quarters. Orange County kicked off this year with a three-cent increase, which brought the average asking rent to $2.30 per square foot per month.
The greatest quarterly spike was seen in South Orange County, where new construction helped push the average asking rate up 9 cents to $2.45. Asking rents for the new vacant spaces throughout South Orange County ranged in price from $2.15 to $3.10 per square foot.
Construction
Despite the signs of a settling market in the first quarter, construction activity remained brisk. More than 640,000 square feet were added to the office base as development wrapped up on 22 buildings, contained within nine new complexes. One new build-to-suit project leased by Experian,South Coast Metro Center,broke ground in Costa Mesa during January, adding approximately 500,000 square feet to the current development activity in the market.
At the end of the first quarter, a total of 3.8 million square feet of office space were under development, mostly in the southern portion of the county. More than half (52%) of the construction activity is in the Airport Area, and another 33% in South Orange County.
The OC Industrial Market
The Orange County industrial market, which reached record activity highs and vacancy lows in 2000, showed signs of cooling in the first quarter of 2001 (see story on page 26).
Vacancy Rates
After reaching a record low vacancy rate of just 1.2% at the end of last year, the industrial vacancy rate had almost no place to go but up. Because the small amount of space that remained was older, lower-quality space, the vacancy rate for the industrial market ticked up slightly to 1.5% in the first quarter of 2001. Manufacturing and warehouse vacancy edged up to just more than 1%, and research and development vacancy rose to 3%. The overall availability rate for industrial space in OC increased to 5.8% in the first quarter; however, finding large available spaces has become increasingly difficult. Some 78% of available spaces on the market at the end of the first quarter were smaller than 50,000 square feet.
Net Activity
Due to the shortage of vacant quality space, the OC industrial market experienced negative net absorption of 310,837 square feet as tenants began migrating toward outlying markets such as Corona. The North Orange County M & W; market, which had virtually no vacancy at the end of last year, was hit the hardest with a negative net absorption of 410,722 square feet in the first quarter, yet maintained a vacancy rate of less than 1%. West and South Orange County performed well in the first quarter, reporting positive net absorption in both the M & W; and R & D; sectors. Sale and lease activity in the Orange County industrial market tapered off to a combined total of 3.1 million square feet, a slowdown of 36%.
Average Asking Lease Rates
The average asking lease rate for industrial space stabilized in the first quarter at 63 cents per square foot per month, the same rate reported in the fourth quarter and in the first quarter of last year. The asking rent for M & W; space dipped 1 cent in the first quarter, as older spaces came onto the market, and newer, more expensive space remained scarce. The asking lease rate for R & D; space moved in the opposite direction by increasing 6 cents to an average of 80 cents per square foot. The southern portion of the market continues to dominate the rent scale with average asking rates of 71 cents and 76 cents per square foot in the Airport Area and South Orange County, respectively.
Construction
In response to the lack of quality vacant space in Orange County, industrial construction activity increased during the first quarter, particularly in the M & W; sector. North Orange County, with an M & W; vacancy rate of less than 1%, had the most development under way, with 14 M & W; projects totaling more than 500,000 square feet. Land prices for R & D; construction have nearly doubled over the past five years, particularly in the southern portion of the county. Much of the remaining entitled land is being developed as office projects in pursuit of higher returns. R & D; construction activity slowed to 116,909 square feet in the first quarter, the majority in West Orange County, with a single project in South Orange County.
The OC Retail Market
The Orange County retail market remained strong in the first quarter, with single-digit vacancy rates and positive absorption. However, the overall market indicators reflected the uncertainty of the changing times as activity began to slow, along with the economy.
Vacancy Rates
The vacancy rate for retail space, which had been hovering around 8% for the past four quarters, ended the first quarter at 8.4%, up from 7.9% in the fourth quarter. Specialty centers, which are defined by a dominant theme and can be more susceptible to changes in consumer behavior, suffered the greatest vacancy increase in the first quarter. The vacancy rate for specialty centers rose 25% in the first quarter, to 13.1%; however, that still was slightly lower than the vacancy rate in the first quarter of last year. Strip center vacancy remained steady at 7.1%, the lowest rate of the first quarter.
Net Absorption
Although the market softened in the first quarter, total net absorption remained positive. Power centers contributed the most positive absorption with a total of nearly 150,000 square feet. Completion of The Marketplace Phase III, the popular power center bordering Tustin and Irvine, brought about 206,840 square feet of positive absorption alone.
Neighborhood centers also contributed to the quarter’s absorption with more than 45,000 square feet of positive activity in South Orange County.
Lease Rates
The overall average asking lease rate for retail space held steady at $1.72 per square foot per month in the first quarter. Nonetheless, annual lease rates appreciated at a robust 11%. Central Coast and South Orange County, the two most affluent markets, each experienced 2% quarterly asking rent increases, to $2.12 and $2.05 per square foot, respectively. Average rents in Central Coast, where asking lease rates reached $3.00 per square foot for space in a power center, topped the county average by 23%. The average asking lease rate for West Orange County also rose 2% in the first quarter, but remained less than $2, along with the North and Central Orange County markets.
Construction
New development continued to expand the retail base in the first quarter. Completion of The Marketplace, Phase III added 425,000 square feet of gross leasable area to the Central Coast market. Construction on Plaza El Paseo, in the Ladera Ranch neighborhood of Rancho Santa Margarita, added approximately 150,000 square feet of development activity. This new power center will provide another foothold to Kohl’s department store expansion into Orange County.
In addition to the new ground-breaking, South Orange County had 800,000 square feet of construction activity under way at the close of the quarter, including two community centers, one neighborhood center and one strip center.
The OC Hotel Market
In a reflection of tight financial markets and a slowing economy, first-quarter hotel sales dropped throughout the Southern California region compared to the same period last year.
In Orange County, there was just one sale in the first quarter, compared with 12 last year. That one sale,of the 46-room Anaheim Lodge in Anaheim,carried a price tag of $1.5 million. Last year, the 12 first-quarter sales totaled $20.6 million and 627 rooms.
Though OC had the largest drop in number of sales in the Southland, every county but San Diego saw sales decline. Hotel deals dropped from 18 to 12 in Los Angeles; from eight to three in Riverside and from four to one in San Bernardino.
San Diego remained flat, with eight sales, the same as a year ago. But the eight sales this year accounted for only $15.4 million in total volume and 402 rooms, compared with $108.7 million in volume and 874 rooms in 2000.
The average price per room in Orange County dropped to $32,608 from $51,922 a year ago. Similar declines were seen in other areas, with Riverside County posting the only increase in average price per room, up to $59,444 from $44,557 last year.
Overall, Southern California had an 18% drop in large hotel sales (those for more than $5 million) in the first quarter. Northern California, however, saw its large hotel sales drop 54%.
While there are a lot of hotels on the market priced at $5 million and above, current California prices are at or above replacement costs, causing more owners to hold on to their properties.
Though large hotel sales are expected to continue to slow during the remainder of the year, the market for hotels priced at less than $5 million remains robust.
