By JOHN WEINER and CAMERAN LINDEE
Vacancy for office space in the John Wayne Airport area increased in the third quarter for the third straight quarter, ending at 7.9%. The increase was due, in no small part, to the slow down of the mortgage industry and mortgage tenants. Many of these companies have downsized or closed, releasing space back into the market for sublease. It is important to note that of the larger blocks of mortgage subleases that have come onto the market, the majority have been backfilled with new tenants or subsequently have been taken off the market.
The third quarter average asking rental rates in the airport area increased to $2.55 per square foot. This is an increase of 2.8%, or 7 cents from the second quarter, and a 10.9% increase from third quarter of 2005.
The rise in rental rates has been driven by a number of factors. First of all, low vacancy rates and limited construction have yielded a relatively low number of alternatives for tenants looking to relocate, forcing them to renew at rates that are far above what they are currently paying. Another factor that has caused this spike in rental rates is an increase in tenant improvement costs in the past 18 months. This has forced landlords to push more tenant improvement costs back onto the tenant through increased rental rates, which has made renewing at an existing location at a higher rental rate a more viable option for many tenants.
The market for tenants needing 5,000 square feet or less continues to be robust. But low vacancy has limited the availability of quality space for tenants in this size range. This has led to bidding wars, where multiple tenants are negotiating for the same space.
There is much anticipation as to how the construction of nearly 1.1 million feet of office space will affect vacancy and rental rates. With no new space to be completed until the third quarter of 2007, there is an expectation that vacancy rates will decrease to the 6% range and that rental rates shall continue to be strong in the next 12 months. According to projections, the airport area will see positive absorption during this timeframe. This positive absorption coupled with the limited quality alternatives for tenants, will make the move to a new building a much more appealing option.
Weiner is a senior vice president in the Newport Beach office of CB Richard Ellis Group Inc. Lindee is an associate in the Newport Beach office of CB Richard Ellis.
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