By SIMON DILLON
South County has recorded steadily declining vacancy rates during the past year, down from more than 13% a year ago to less than 6% in the third quarter.
South County counts about 19.7 million square feet of office space, accounting for 21% of the more than 92 million square feet of total office space in OC.
The lack of available office space is making it very challenging for tenants wishing to move or expand. Almost 1.5 million square feet of office space is under construction, which is only slightly more than total absorption of 1.3 million square feet this year. So if absorption continues at the existing rate, the office sector will add one year’s supply of space.
The strong absorption has led to rental rate increases of 10.9%.
Some examples of asking rate increases are: AEW’s 240,000-square-foot Lakehills Office Park saw rates rise from $2 per square foot to $2.25 per square foot, full service gross; Mammoth Equities’ Saddleback Financial Center went from $1.85 to $2.15 per square foot; and McMorgan’s Mission Heritage saw rates rise from $1.95 to $2.25.
Surprisingly, the market still is about 5% below the previous top asking rate mark.
South County is home to many large and small mortgage companies. Depending on how the mortgage sector plays out amid rising interest rates, there could be some relief in South County if existing second-generation office space is freed up in the form of sublease or default space.
It is important to note that second-generation space is much more marketable than brand new raw space. That’s because South County tenants typically are looking for office space that works without going through a tenant improvement negotiation, which could result in tenant costs for the build out, not to mention developers’ higher rental expectations.
Dillon is a vice president in the Newport Beach office of CB Richard Ellis Group Inc.
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