By SIMON DILLON
The vacancy rate for low-rise office space in Orange County dropped to 9% in the second quarter, versus 13.6% a year ago.
This 34% change in the vacancy rate has pushed asking rates up about 5%. The slower rate of increase in low-rise asking rates compared to the roughly 10% gain in the high-rise asking rate during the same period is due to the massive 50 million-square-foot inventory of low-rise space in OC.
High-rise space has led the spike in rate increases. In fact, asking rates have increased so quickly in the high-rise office market that a vacuum effect has developed in that sector, where deal activity has momentarily slowed and tenants now are being forced to consider cheaper low-rise alternatives.
As low-rise alternatives diminish, high-rise activity and rates likely will surge forward again.
An example of the hot leasing market for low-rise office space is one of the county’s largest office parks: Orange County Business Center in Santa Ana.
The center, which is owned by PS Business Parks, includes almost 500,000 square feet of low-rise office space. Orange County Business Center recently saw six new leases deals and two expansion and renewals signed in the past quarter for a total of about 61,000 square feet.
Tenants signing deals at Orange County Business Center include Fremont Investment and Loan, BP Marketing, NIS America and Fidelity Title.
Leasing velocity is expected to continue well into next year with landlords seeing healthy increases in rental rates as options for tenants disappear.
The wild card is the mortgage industry, which typically takes up space in lower-rise buildings due to their efficient large floor plans, free surface parking and convenience.
OC is known as a subprime mortgage lending center, and if the industry experiences a severe downturn, a significant amount of low-rise office space likely would come back on the market in the way of sublease, buyout and default space.
Dillon is a vice president in the Newport Beach office of CB Richard Ellis Group Inc.
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