SPACE DATA
Looks Like Office Market Has Seen the Worst
Orange County likely has passed through the bottom of the market.
Countywide, availability rates dropped slightly in the third quarter to 20.3%, versus the prior quarter’s 21.2%. Even more importantly, not since year-end 2001 has the availability rate for the greater John Wayne Airport area fallen below 20%.
As Orange County’s central business district, the John Wayne Airport area accounts for almost half of the county’s overall inventory. Therefore, the 10% decline in the airport area availability rate to 19.9% is statistically telling.
While these statistics, by any definition, still describe a tenant’s market, they may indicate the beginning of a new market trend, the results of which haven’t been formally realized.
Reflecting the typical lag in reaction to changes in availability rates, the overall rental rate dropped slightly to $19.59 in the third quarter.
The preponderance of sublease space continues to impact local market dynamics, too. The 3.2 million square feet of sublease space accounts for 18% of all availabilities, or 3.6 percentage points of the county’s overall availability rate.
Although mortgage companies still dominated large leasing transactions in the third quarter, this trend is expected to subside. As rising interest rates have a profound, negative effect on this industry’s business, mortgage companies likely will be reevaluating their space requirements.
Washington Mutual said that August loan applications were down 40% from the previous month.
Ironically, the mortgage industry, which was perhaps the lone driver of tenant demand during the real estate downturn, may well be a major contributor to increases in available supply in the coming months,thus slowing an otherwise broad-based recovery.
The commercial investment sales market remained active.
Favorable interest rates, coupled with a nascent yet palpable sense of a national and local economic recovery, have made investment in real estate assets a comparatively attractive investment vehicle.
This appetite continues to drive cap rates down, even in the face of flat or falling lease rates.
Landlords and tenants in Orange County seem to have developed a “wait-and-see” attitude. Although it appears that both groups sense that the bottom of the market has been reached, current availability rates do not warrant near-term rental rate appreciation.
It’s not yet clear if the strength of the economic recovery can battle what appears to be an impending increase in sublease supply.
This may determine the direction of the market during the next several quarters.
Data and analysis provided by Studley.
