Real Estate Watch: South County
Oversupply Pushes Vacancies Up, Rates Down
By BOB DAVIS
There was nearly 1.3 million square feet of new construction completed in the fourth quarter, which brought the year’s total to nearly 3 million square feet.
Several of the major new projects completed in the fourth quarter were Ford Motor Co.’s building (265,000 square feet) in the Irvine Spectrum, the latest phase of Discovery Business Center (246,000 square feet), also in the Spectrum, and the new phase of The Summit Office Campus (300,000 square feet) in Aliso Viejo.
This new inventory has created a classic oversupply situation.
In addition to the oversupply, the economy has slowed, job growth has lagged, and disappointing corporate returns have weakened the South Orange County office market. Meanwhile, sublease space available has more than doubled in the past year. As a result, vacancy has jumped to more than 20% a near doubling of the amount of vacant space during the year.
The dramatic increase in vacancy caused average asking lease rates to drop to $2.31 per square foot per month from $2.45 a year ago. However, with less than 100,000 square feet under construction, vacancy should peak early this year.
Landlords are aggressively seeking tenants to fill their vacancies. In addition to the lower rates, they are offering free rent, increased tenant improvement allowances and other concessions. Landlords also are seeking to renew existing tenants early in order to stabilize their vacancy.
This has led to steadily increased tenant activity in the past six months. Net absorption increased dramatically in the past quarter to 512,047 square feet. The majority of this activity was well under way prior to Sept. 11 because little transpired after that date.
This trend is expected to continue during 2002 as the South Orange office market swings back toward equilibrium between supply and demand.
Davis is first vice president in the Newport Beach office of CB Richard Ellis. Data provided by CB Richard Ellis Global Research and Consulting.
