REAL ESTATE WATCH: HIGH-RISE OFFICE MARKET

With the uncertainty of the financial markets weighing heavily on the minds of tenants and landlords alike, the high-rise office market in Orange County has gone through a transitional quarter like other types of real estate across the county.

Vacancy levels crept up by 1.2% to start the fourth quarter at 20.5%. Lease rates have decreased from an average of $3.06 per square foot in the second quarter to $2.94 today.

This drop in lease rates was largely due to landlords who had previously “propped up” rates and then gave concessions to achieve the effective rates tenants were aiming for.

Now the market has changed to lower asking rates with fewer rental concessions to get a deal done.

Landlords had been aggressively competing for active deals by offering concessions such as free rent, abated parking and reduced asking rates to entice the tenants who were out shopping.

Many tenants, however, have been slow to commit and are postponing their real estate decisions by doing short-term renewals, downsizing or not expanding like anticipated until the economy reaches some sort of equilibrium.

We have seen more than 200,000 square feet of sublease space become available during the past quarter, which seems to be absorbed rather quickly due to the discounted rates, shorter terms and possibility of furniture, fixtures and equipment being included.

Harder Hit Markets

With the majority of the sublease and direct space being in the airport area and Central County, we have seen the average asking lease rate decrease the most in these markets.

The airport area rates fell from $3.24 in the second quarter to $3.14 in the third quarter. Central County’s rates went from $2.61 to $2.44.

North and South County maintained relatively stable leasing activity during the third quarter, while the airport area had 143,231 square feet of negative absorption and Central County had 174,629.

The negative absorption in the airport area was largely due to Washington Mutual Inc. putting 100,000 square feet on the market for sublease (which they have now taken off the market while ironing out the details of their sale to JPMorgan Chase & Co.).

Central County has seen some larger subleases expiring and going back on the market as direct space such as Alliance Imaging Inc. (which moved to Newport Beach and left 46,887 square feet in Anaheim), Ameriquest Mortgage Co. (which went out of business last year and left 140,000 square feet in Orange) and Argent Mortgage (Ameriquest’s sister company that was sold to Citigroup Inc. last year and left 38,879 square feet in Orange).

There is a silver lining through all of this. We have seen specific users emerging who are looking for high-rise office space, such as professional/technology schools, law firms, healthcare organizations, engineers and niche users, who were not previously as active in the high-rise market. Because of the softness in rates, they have become prospective players.

In addition, OC continues to be one of the most desired places to live in the country and has a diversified base of businesses.

According to Torto Wheaton Research, part of CB Richard Ellis Group Inc., the business services sector in OC is positioned to grow by 7,700 jobs during the next year, which will fuel the demand for office space here.

Hill is a senior associate in the Anaheim office of CB Richard Ellis.