By DEAN CHANDLER
Significant changes are taking place in the greater John Wayne Airport area office market.
The area includes 43.2 million rentable square feet in 650 buildings in the cities of Irvine, Costa Mesa, Newport Beach, Fountain Valley and southern portions of Santa Ana and Tustin.
Change is expected to dominate this market, with vacancy at 7.2% and more than 1.8 million square feet of positive absorption this year. The submarket has recorded 10 consecutive quarters of positive absorption.
Rental rates are set to increase at an even faster rate than the gains they’ve recently posted. The catalyst for higher rates: significant barriers to entry in developing new office space, such as uncertain and rapidly increasing construction costs, competition for land from residential development (where land values can be two to three times office land values) and a longer city entitlement and permitting process.
This change is creating a market where the pendulum has swung in favor of landlords.
Average asking lease rates have increased about 8% since the beginning of the year for all office types. Class A space has seen higher-than-average rental increases, with some office space going for more than $3 per square foot, full service gross.
Under these competitive and changing circumstances, tenants are having to be more flexible when they look for space.
As multiple tenants may compete for the same space, landlords are being more selective in the tenants they choose to fill vacant space. Landlords are going after tenants that provide the greater return, ones with better credit and those that will help boost the value of buildings.
Even with large blocks of space difficult to find and double-digit rental increases predicted for the next two years, developers have been slow to build new speculative office space due to the barriers to entry noted above.
Will continued interest rate hikes burst this bubble by causing a fallout among mortgage companies that have absorbed considerable space during the past few years?
There certainly will be layoffs in the mortgage industry in Orange County. Last week, the parent of subprime lender Ameriquest Mortgage Co. said it was cutting about 10% of its workers, or 1,500, companywide. It’s unclear how many of those laid off are in OC.
However, the industry’s restructuring should not have a significant effect on the market in terms of availability or rental rates.
The bulk of OC’s mortgage industry space is comprised by the top mortgage companies, which account for about 60% of the space occupied. OC mortgage companies represent about 5 million square feet of space, or some 5% of the total office base here (not including mortgage-related industries such as title companies or escrow companies).
Any downsizing should be offset by new job creation in other business sectors.
At 3.8% in October, OC has one of the lowest unemployment rates in the country. California’s unemployment rate was 5% in October, with the U.S. rate pegged at 4.6%.
Positive job growth is predicted for 2006. Forecasters call for some 30,300 new jobs created in OC next year, including 11,000 in the office sector.
Chandler is a senior vice president in the Newport Beach office of CB Richard Ellis Group Inc.
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