By AL MASTERS
The vacancy level, excluding sublease space, for high-rise office space in Orange County ended the second quarter at 9.8%, up 1% from the first quarter.
A vacancy rate in single digits still is considered by brokers as a healthy market even though most are recognizing a softer pace of absorption, which is expected to continue until 2008.
Industries that are being affected by the housing slowdown, such as banks and other financial firms, will suffer declines in profitability and respond by cutting workers that they added during the housing and consumer finance boom.
OC’s office market is dealing with the rapid disintegration of the subprime mortgage lending industry, which is and will continue to lead an increase in vacancy,both sublet and direct.
While net absorption in the airport and West Orange County submarkets was a positive 50,799 square feet, it was offset by a negative net absorption in the North, Central and South Orange County submarkets of 44,140 square feet. That resulted in only 6,659 square feet of positive net absorption for the county overall.
Absorption of high-rise space in the county is a negative 98,607 square feet, down from the first quarter’s 105,266 square feet.
Average asking lease rates for high-rises here continued to increase from the first quarter by 6 cents per square foot per month to $3.12. Rates were highlighted by the airport area, which posted a rate of $3.38 per square foot, and South Orange County, at $3.12 per square foot.
The North, Central and West Orange County lease rates still lagged those in the airport area primarily due to the increased asking rates for buildings under construction and the high prices achieved by sellers of office building portfolios such as the sale of Equity Office Properties Trust’s properties to Blackstone Group LP, and Blackstone’s resale to Maguire Properties Inc. Owners of properties under way and newly-acquired buildings do not anticipate any decline in asking rental rates.
Four high-rise projects under construction in the airport area and two in South Orange County will bring 1,966,571 square feet to the market. They have 221,202 square feet, or 11%, preleased.
With landlords of new buildings holding firm on the higher asking rates, tenants looking at renewing or relocating to another building are discovering there is a cost differential to relocate. Unless there is a compelling reason to move, many tenants are staying put after entering the market and comparing their alternatives. Additionally, as older building rents continue to escalate upward, tenants also are looking to class B or C quality buildings, which are 20% to 35% less in cost.
Masters is a first vice president in the Newport Beach office of CB Richard Ellis Group Inc.
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