Real Estate Watch: High-Rise Office Market
Some Optimism for Soft High-Rise Office Market
By BILL WELCH
The high-rise office market in Orange County continued to show mixed results in the second quarter.
Vacancies fell 2.7% to 14.4 % in the quarter, thanks to positive absorption of 94,700 square feet. While positive, absorption still fell short of expectations.
The John Wayne Airport/Coastal area, representing the largest base of space in the county at 15.5 million square feet, had the largest increase in absorption at 77,800 square feet. At the other end of the spectrum, Central County saw occupancy decrease by 39,300 square feet.
Historically the summer months are a period of inactivity. But this summer’s market has been more active than in the past, which usually signals an impending rise in absorption and expected rental rate increases.
But the current rate of positive absorption doesn’t appear to be enough to have any marked effect on rental rates at the present time. Rates pretty much stayed flat when compared to the first quarter as a continued lack of expansion,and in some cases consolidation,has left businesses searching for a reason to offer them optimism for future growth.
To attract tenants, some landlords have offered concessions last seen during the downturn of the early-’90s: parking fee discounts, added tenant improvements and token rental cuts.
Tenants seemed to have taken advantage of the concessions, which were a big reason for the positive absorption during a normally slow period.
But it’s expected that once absorption establishes a consistent trend, these concessions will soon disappear and a more predictable and traditional transaction structure will emerge.
Construction activity, which slowed significantly at the end of last year, continued to reflect the lack of absorption. No new projects were added during the second quarter, which should result in vacancies remaining stable to the end of the year.
Overall the OC high-rise office market appears to mirror most business trends: flat though stable.
But as opposed to previous down markets, such as the late 1980s and early 1990s, the current high-rise market has a firm base from which to go forward as both owners and tenants remain cautiously optimistic entering the second half of the year.
Welch is a vice president of office properties in the Newport Beach office of CB Richard Ellis.
