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Real Estate Watch: Low-Rise Office Space

Real Estate Watch: Low-Rise Office Space

Low-Rise Office Demand Stays Cool; Landlords Lower Rates

Overwhelming demand for low-rise office buildings in Orange County led to the construction of more than 6.9 million square feet of space during the past two years.

But construction began to taper in the middle of last year, as a weakening economy led to falling demand and oversupply of new space. As a result, the low-rise office market in OC has increasing vacancy rates and decreasing levels of absorption and lease rates.

In response, many low-rise office landlords have reduced their asking lease rates to attract new tenants and retain their current tenants.

Average asking lease rates for low-rise space in OC in the first quarter fell 4.4% to $1.94 per square foot compared to the December quarter.

North and West County each had a two-cent drop in average asking lease rates, considerably less than the county average decrease of nine cents. The John Wayne Airport area had the biggest change in asking lease rates in the first quarter with a drop of 6% to $2.01, vs. the prior quarter. South OC continued to lead the county in asking rents for low-rise space in the quarter, with a lease rate averaging $2.07, 6.7% higher than the county average.

The vacancy rate rose to 15.7% in the first quarter, up from 14.7% in the December quarter. The vacancy rate is 49.6% higher than it was after the first quarter in 2001.

Net absorption was negative as tenants vacated and offered space for sublease. Absorption was better in North and West Orange County, where 227,455 square feet were absorbed in the first quarter.

Construction of low-rise office space decreased to 687,695 square feet and no new buildings broke ground in the first quarter.

Two low-rise buildings were completed in Cypress, adding 112,810 square feet in West County, and one 36,000-square-foot building in the South County’s Irvine Spectrum was finished.

Six buildings are under construction. The completion of Pacific Sunwear of California Inc.’s 180,000-square-foot building in Anaheim Hills and the Fairway Center’s second-phase, 130,000-square-foot building will add more than 300,000 square feet of new low-rise space in North County.

The 418,000-square-foot Newport Technology Center and three projects in the 30,000- to 60,000-square-foot range will add 558,072 square feet of new space to the airport area by the third quarter.

Data & Analysis provided by CB Richard Ellis’ Global Research & Consulting.

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